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Mercury Athletic Footwear: Valuing the opportunity

Week 6 presentation

Jorge Morales

on 3 October 2013

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Transcript of Mercury Athletic Footwear: Valuing the opportunity

Group B: Stefanus Hendriansjah, Eddie, Yaoyao, Maggie Mercury Athletic Footwear: Valuing the Opportunity - Highly competitive market with low growth
- Compete in style, price, and quality
- Success factors: active management of inventory and production Background - Founded in 1965 produce high-quality golf and tennis shoes primarily
-At the beginning in the 1970s, AGI moved into casual footwear
-AGI's 2006 revenue was $470.3 million operating income was $60.4 million, 42% of revenue was from athletic shoes
-AGI's casual footwear was sold by more than 5700 North America stores,( wholesalers and independent distributors)
-AGI's athletic footwear were sale through independent sales representatives (sporting goods stores, athletic footwear retailers)
- AGI did not sell through discount retailers AGI - Was purchased by West Coast Fashion
- 2006 revenue was $431.1 million and EBITDA $51.8 million
- Products were distributed into department stores and discount retailers
- Production placed in China
- Has 4 major product line, in which casual woman apparel was the worst Mercury Athletic footwear 7.NPV rRF = 4.69%
rM = 7.9%
b = 1.12
g = 2.5%
P/E = 8.6 Assumptions
g=1/5*(-27.4% +25.8%-17.3%+15.3%+16%)

TV=Vop at 2011 = FCF2011*(1+g) / (WACC-g)
=29544*(1+2.5%) / (8.96% - 2.5%)
=$468771 5.Terminal Value 5.Terminal Value
TV=Vop at 2011 = FCF2011*(1+g) / (WACC-g)

Average FCF growth rate 5.Terminal Value Leverage=D / V=20%
E / V =80%

WACC=RdAT * D/V + Rs * E/V
=3.6%*20% +10.3%*80%
=8.96% 4.WACC T=40%

RdAT = rd * (1-T)
=6% * (1-40%)
=3.6% 2.Cost of debt 1.FCF

FCF=EBIT * (1-Tax)
+Dep-Change in NWC
-Cap. Exp 1.FCF 1.FCF-NWC

Lower WACC
Lower Cost of Capital
Higher Enterprise value Conservative OR Aggressive

Acquisition price = P/E * Historical Average NI (2004-2006)

Historical Average NI=1/3*(19889+19072+25998)

Acquisition price=8.6*21653=$186216 6.Acquisition Price b=1/2 * (0.97+1.27)=1.12

Rs = rRF+(rM -rRF) * b
=4.69% +(9.7% - 4.69%) * 1.12
=10.3% 3.Cost of equity
NWC = Total CA-Total CL
=(Cash+A/R+Inv+Prepaid Exp)
- (A/P+Accrued Exp)

Change in NWC= NWCt - NWCt-1 1.FCF - NWC 1.FCF of Mercury
2.Cost of debt
3.Cost of equity
5.Terminal Value
6.Acquisition price
7.NPV DCF approach Wound off Women’s Casual footwear after 2007
=> help to achieve a lower acquisition price
=> Lower the future total profitability
=> better to fold this segment into AGI’s Modification ROA = EBIT/ Total Asset

Total Asset Turnover = Sales/ Total Asset

Current ratio = Current Liability/ Current Asset

Debt ratio = Total Liability / Total Asset ratio comparison Exhibit 7 Mercury Athletic Footwear: Projection of Selected Balanced Sheet Accounts Comparison of average revenue growth rate between historical and projected data Exhibit 6 Mercury Athletic Footwear: Base Case Projected Segment Performance Differences between AGI and Mercury Whether Mercury is an appropriate target? Background of Mercury Athletic Footwear AGI and Mercury are dealing in the similar industry/products (strategic fit)

Both of the companies’ manufactures is located in China, it will help AGI overcome the competitive disadvantages

Mercury will double the AGI’s revenue

Mercury will increase AGI’s athletic line presence Common grounds between AGI and Mercury Assumptions - Overhead-to-revenue ratio would conform to
historical averages.
- No independent balance sheet for Mercury
- Women's casual line will wound down in the first
year of aqcuisition Qualitative Method - Useful to determine the competitive advantages
- However it will not yield number figure

In the case of Mercury:
AGI will obtain more product diversification, technology advancement, larger distribution channel IRR Method - NPV = 0
- The rate at which cash inflow =
outflow - Mercury's aqcuisition price = cash outflow

- Mercury's FCF = cash inflow NPV=0 ,
0=-186216 +21238/(1+r)+26729/(1+r)2+22098/(1+r)3+25473/(1+r)4+468771/(1+r)5

thus r=28.05%

compare to the NPV discount rate8.96%, IRR is greater Possible synergies 1) there would be a rise in production and sales as the increased size of this joint corporation.

2) to be more efficient, the joint corporation will probably not require the double employees

3) as of the increased size of this new joint corporation, both companies reverie a relatively higher discount from the row suppliers conclusion AGI should acquire Mercury
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