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Mercury Athletic Footwear

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by

Dylan Marschall

on 14 May 2013

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Transcript of Mercury Athletic Footwear

Mercury Athletic Footwear: Valuing the Opportunity Active Gear Incorporated -Founded in 1968 by Daniel Fiore Mercury Should AGI purchase Mercury? Are the projections formulated by Liedtke appropriate? Calculations -Producer, designer and distributor of branded athletic and casual footwear -Targeted the young adult market cost of debt: 6% tax rate: 40% EBIT Margin:9% degree of leverage:20% Conclusion -Company sold to West Coast Fashions (WCF) in
2003 -Since the acquisition, Mercury sales have
gone downhill and thus WCF decided to sell
the line in 2006. Revenue Growth:3% AGI could enter new market segments and therefore will have the advantage to target the larger market AGI will get contracts with larger manufactures AGI will be able to compete with the big companies potential to double revenues AGI should acquire Mercury AGI could get better conditions from raw material suppliers Potential to double revenues
Increase leverage with manufacturers
Increase long run growth rate
Expand presence with key retailers and distributors. WACC WACC=Weight(Debt) xCost(Debt) x(1-Tax Rate)+Weight(Equity) xCost (Equity) Free Cash Flows FCF = EBIT(1-Tax) + Depreciation - Change in Net Working Capital -Capital Expenditure Weight of Debt 20%
Cost of Debt 6%
Tax Rate 40% CAPM Model

Necessary to calculate Cost of Equity

Rate(Riskfree) 4.93%
Beta ?
Rate(Market) 10.96% BETA Beta consists out of 2 parts, Business Risk and Financial Risk

Industry Average 1.481

Industry Average Business Risk only 1.29

Beta relevered with Mercurys Financial Risk 1.484 WACC Weight of Equity 80%
Cost of Equity 13.83%
Weight of Debt 20%
Cost of Debt 6%
Tax Rate 40% Cost(Equity)=Rate(RF)+Beta*(Rate(M)-Rate(RF) WACC=80%x13.83%+(1-40%)x20%x6%
WACC=11.84% Net Present Value -Founded in 1965 Terminal Value=FCF(2011)/(WACC-Perpetual Growth Rate) -Produced high quality specialty shoes for golf & tennis players. 1970-expanded line to casual footwear Brand & logo give sense of wealth, fashion, & an active lifestyle. Today-newly evolved Athletic line makes up for nearly 42% of yearly Revenues Problem: Their small size has become a competitive disadvantage
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