1. Harvard Business Cases Valuation
Fin 321
Dr. Ghosh Adriana Nava
Kristie Tillett
Grace Tung
Eddie Pinela
Zhibin Yang

2. Outline Introduction Question I : Is Mercury an appropriate target?
Background
History
Question I : Is Mercury an appropriate target?
Question II: Are the given projections appropriate?
Question III: Estimate the value of Mercury
Given information
Formulas
Detailed calculations
Conclusion

3. West Coast Fashions Inc.
WCF is a large designer and marketer of men's and women's branded apparel
WCF is planning for a reorganization which includes the shedding of its footwear division, Mercury Athletic

4. Athletic and Casual Footwear Industry
Competitive
Casual segment
Athletic segment
Lifecycle
12-16 months
Import taxes and tariffs
China

5. Mercury Athletic Branded athletic / Casual footwear
Mercury was founded by Daniel Fiore
$431.1 million / $51.8 million
Financial Performance
Mercury products
Athletic Footwear
Men - largest segment and constituted its core business
Women - had subpar performance
Casual Footwear
Men - peaked in 2004, declined since then
Women - worse-performing line of shoes

6. Mercury Athletic Performance In late 2006 Didn't fit with WCF
Mercury's size
customers
brand image
Determined to sell the business
Mercury's prospective buyer was Active Gear Inc.

7. Active Gear Inc. Founded in 1965 Privately held footwear company
The most profitable firms in the footwear industry
Beginning 1970s
Casual/ recreational footwear
Age 25-45
Sold by 5700 retail stores
Outsourcing
However, the company was much smaller than many competitors and AGI's executives felt its small size was becoming a competitive disadvantage

8. Given Information Cost of debt - 6% Risk free rate1 - 4.93%
Expected market return - 9.7%
Tax rate - 40%
Beta - 1.6

9. Question I
Is mercury an appropriate target for AGI? Why or why not?
Estimates based on assumptions
Sufficient evidence to suggest it will be advantageous for AGI to acquire Mercury Athletics.
Culture is important
If the cultures drastically differ
Inhibit efficiency
Effectiveness of strategic planning.

10. Diagram Diagram 1 The revenues Comparable Very closely identical
Acti
The revenues
Comparable
Very closely identical
Mercury athletic has lower overhead costs
Acquisition
More leverage with producers.

11. Question II CAGR = 9.7% Expected market return V.S. CAGR
Review the projections formulated by Liedtke. Are they appropriate? How would you recommend modifying them?
CAGR = 9.7%
Expected market return V.S. CAGR
CAGR has no risk in formula
3.0% revenue growth end of time

12. Question III
Estimate the value of Mercury using a discounted cash flow approach and Liedtke’s base case projections. Please show your work, and explain any assumptions that you make.

13. Free cash flows cont.
We repeated the same process for cash flow years
$26,729
$22,098
$25,473
$29,544

14. Cost of Equity
CAPM = KRF β ( KM - KRF2 )
4.93%+ 1.6 (9.7%-4.69%)
= 12.95%
(CostS)
*assumption CAGR

15. WACC = WD costD (1 - T) + Ws costs
0.2 [0.06 ( )] (0.1295) =
=11.08%

16. Terminal Value Formulas
VN= FCFn ( 1 +g FCF )
WACC-gFCF
= $29,544 ( )
= $376,613

17. Enterprise Value

18. Conclusion
Based on enterprise value $359,653 as well as increasing market share in manufacturing leverage we believe that AGI should go through with the acquisition at the enterprise value price.

19. ANY QUESTIONS?!
Thank you!