Mercury Athletic Footwear Evaluation Essay

3140 words - 13 pages

MERCURY ATHLETIC FOOTWEAR

Problem statement:

West Coast Fashions, Inc a large business of men’s and women’s apparel decided to dispose of one of their segments; Mercury Athletic. John Liedtke, head of the business development for Active Gear, Inc saw it has a possible opportunity for them to acquire it. The footwear industry is very competitive, with low growth and stable profit margins. AGI is very profitable but it is smaller than its competitors, which is becoming a disadvantage. Therefore, Liedtke believes that if they takeover Mercury will double AGI’s revenue, increase it’s leverage with contract manufactures and expand its presence with key retailers and distributions. Liedtke ...view middle of the document...

Then we can see that the % revenue product compensates for the lack in both companies. The revenue for the athletic shoes in AGI is low therefore taking Mercury under their wing would increase that revenue and vice versa for the casual shoes as well. Finally when looking at revenue growth the industry average is 10 % and AGI is below it putting the company at risk while Mercury is above it by 2.5 % more, it would be good to acquire the company to stay on top of the market.

Free cash Flow of Mercury
| 2006 | 2007 | 2008 | 2009 | 2010 | 2011 |
Revenue | 431,121.00 | 479,329.00 | 489,028.00 | 532,137.00 | 570,319.00 | 597,717.00 |
Less: divisional operating expenses | 423,837.00 | 427,333.00 | 465,110.00 | 498,535.00 | 522,522.00 |
Less: corporate overhead | | 8,487.00 | 8,659.00 | 9,422.00 | 10,098.00 | 10,583.00 |
EBIT | 42,299.00 | 47,005.00 | 53,036.00 | 57,605.00 | 61,686.00 | 64,612.00 |
Less: taxes | 16,919.60 | 18,802.00 | 21,214.40 | 23,042.00 | 24,674.40 | 25,844.80 |
NOPAT (EBIT (1-t) | 25,379.40 | 28,203.00 | 31,821.60 | 34,563.00 | 37,011.60 | 38,767.20 |
Plus: depreciation | 9,506.00 | 9,587.00 | 9,781.00 | 10,643.00 | 11,406.00 | 11,954.00 |
Net working capital | 104,116.00 | 108,685.00 | 111,333.00 | 121,138.00 | 129,825.00 | 136,059.00 |
Less: changes in working capital | | 4,569.00 | 2,648.00 | 9,805.00 | 8,687.00 | 6,234.00 |
Less: capital expenditures | | 11,983.00 | 12,226.00 | 13,303.00 | 14,258.00 | 14,943.00 |
Less: changes in other assets | | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
Plus: changes in other liabilities | | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
Free cash Flow | | 21,238.00 | 26,728.60 | 22,098.00 | 25,472.60 | 29,544.20 |
Terminal Value | | | | | | 522,906.19 |
| | | | | | |
Discount Rate | 7.65% | | | | | |
Growth rate | 2.00% | | | | | |
Discount cash flow | | 19,728.75 | 23,064.72 | 17,713.76 | 18,967.81 | 382,140.54 |
The total discount cash flow | 461,615.58 | | | | | |
| | | | | | |
Acquisition price | 186,215.80 | | | | | |
NPV | 275,399.78 | | | | | |

Quantitative valuation:

In the Mercury Segment Data 2004-2006 exhibit the EBIT margin is 9.8 % that means knowing that the industry average is 10 % it shows us Mercury’s profitability after removing all expenses but excluding taxes and interest. It is important to look at it because it is a measure that investors can use to evaluate the financial health of the company. However Liedkte being more conservative he says that the combined businesses could achieve and EBIT of 9 % and when looking at the projections for Mercury from 2007-2011 we can see a growth in earnings. So then what are the cash flows if Liedtke thinks the combined businesses will have a revenue growth of 2% in year 2011 considering we discounting back to 2006. We need to calculate the Free Cash Flow (FCF) in...

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