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The Timken CompanyCase Questions1. How does Torrington fit with The Timken Company? What are the expected synergies?2. What is your stand-alone valuation of Torrington? Assume NWC = 13.5% sales3. What is your with-synergies valuation of Torrington? Assume NWC = 13.5% sales4. Should Timken be concerned about losing its investment-grade rating? How do Timken's financial ratios compare with those of other industrial firms in 2002? How would those ratios change if Timken borrowed $800 million, for example, to buy Torrington?5. If Timken decides to go forward with the acquisition, how should Timken offer to structure the deal? Is Ingersoll-Rand likely to want a cash deal or a stock-for-stock deal?     

1. Why does Porsche hedge its foreign exchange exposure? Does it make sense, from the perspective of shareholders, for

Porsche to hedge? Does it make sense from management's perspective? Are there potential differences in interest between management

and shareholders regarding the hedging policy?

2. Suppose it is end of November 2007, and Porsche reviews its hedging strategy for the cash flows it expects to obtain from

vehicle sales in North America during the calendar year 2009. Assume that Porsche entertains three scenarios: The expected volume of North

American sales in 2009

is 32,750 vehicles. The low-sales scenario is 30% lower than the expected sales volume, and the high-sales scenario is 30% higher than the

expected sales volume. Assume, in each scenario, that the average sales price per vehicle is $90,000 and that all sales are realized at the end

of November 2009. All variable costs incurred by producing and shipping an additional vehicle to

be sold in North America in 2009 are billed in ? and amount to ?60,000 per vehicle. Characterize how Porsche's ? cash flows, net of variable

costs, obtained from its North American sales depend on the spot exchange rate that prevails at the end of November 2009, if:

a. Porsche does not hedge its currency exposure at all;

b. Porsche hedges by selling forward US$ equal to the amount of expected 2009 sales with a two- year forward contract;

c. Porsche hedges by buying two-year European at-the-money put options on US$ (providing to Porsche the right to sell US$,

receiving ?, at the strike exchange rate) in sufficient quantity to have the right to sell an amount of US$ equal to expected 2009 sales.

3. Based on your analysis of question 2, what's your view on the foreign exchange hedging strategy and the hedging instruments

chosen by Porsche? If you were Porsche's CEO, would you implement a different strategy? If yes, why? If no, why not?

4. How might Porsche's ownership structure influence the hedging strategy pursued by management?

5. Do you think Porsche's strategy of using options to acquire a stake in VW (instead of buying stocks directly) is a sensible one?

Or do you agree with the critics who argued that Porsche was speculating with shareholders' money and that it had become a "hedge fund"

that neglected its core business?


Assignment: You work for the Berea Amalgamated Products Company that produces coloring books, velvet paintings and other fine arts. 

You are proposing a new venture, to branch out into figurine animals and cartoon characters but this will require new equipment and a capital outlay.

You need to explore the financials before further researching unto a complete recommendation relative to this proposed venture.

Pertinent financial information is below briefly stated:

Cash

2,000,000

Accounts Payable and Accruals

18,000,000

Accounts Receivable

28,000,000

Notes Payable

40,000,000

Inventories

42,000,000

Long-Term Debt

60,000,000

 

 

Preferred Stock

10,000,000

Net Fixed Assets

133,000,000

Common Stock

77,000,000

 

 

 

 

Total Assets

205,000,000

Total Claims

205,000,000


  • Last year's sales were $225,000,000.
  • The company has 60,000 bonds (par value $1,000.; 30-year life) with 15 years until maturity. The bonds carry a 10 percent annual coupon, and are currently selling for $874.78.
  • You also have 100,000 shares of $100 par, 9% dividend perpetual preferred stock outstanding. The current market price is $90.00. Any new issues of preferred stock would incur a $3.00 per share flotation cost.
  • The company has 10 million shares of common stock outstanding with a currently price of $14.00 per share. The stock exhibits a constant growth rate of 10 percent. The last dividend (D0) was $.80. New stock could be sold with 15% flotation costs.
  • The risk-free rate is currently 6 percent, and the rate of return on the stock market as a whole is 14 percent. Your stock's beta is 1.22.
  • Stockholders require a risk premium of 5 percent above the return on the firms bonds.
  • The firm expects to have additional retained earnings of $10 million in the coming year, and expects depreciation expenses of $35 million.
  • Your firm does not use notes payable for long-term financing.
  • The firm considers its currentmarket valuecapital structure to be optimal, and wishes to maintain that structure. (Hint: Examine the market value of the firm's capital structure, rather than its book value.)
  • The firm is currently using its assets at capacity.
  • The firm's management requires a 2 percent adjustment to the cost of capital for risky projects.
  • Your firm's federal + state marginal tax rate is 40%.
  • Your firm's dividend payout ratio is 50 percent, and net profit margin was 8.89 percent.

PROJECT DELIVERABLES: Steps to WACC for the Optimal Capital Structure

  • Find the costs (rate of returnunder current market conditions) of the following individual capital components:
    • Long-term debt, Bonds. [Hint:PV=-$874.78 (current selling price of Bonds), FV = $1000, PMT=$100, n=15 solve for i]. This is a calculator problem and if you follow the hints you will find the effective rate (see textbook appendix 10B, pages 337: Bond Valuation)
    • New Preferred stock
    • New common stock
  • Compute the current Total Value of the Firm depicting its long-term elements of the capital structure.
  • Determine the target percentages for the optimal capital structure: i.e. the weighted average cost of capital (WACC) using current values.




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