Harvard Business Cases Valuation

Fin 321

Dr. Ghosh Adriana Nava

Kristie Tillett

Grace Tung

Eddie Pinela

Zhibin Yang

• Introductiono Backgroundo History

• Question I : Is Mercury an appropriate target?

• Question II: Are the given projections appropriate?

• Question III: Estimate the value of Mercuryo Given informationo Formulaso Detailed calculations

• Conclusion

Outline

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

Athletic and Casual Footwear Industry • Competitive

• Casual segment

• Athletic segment

• Lifecycle

• 12-16 months

• Import taxes and tariffs

• China

Mercury Athletic• Branded athletic / Casual footwear

• Mercury was founded by Daniel Fiore

• $431.1 million / $51.8 million

• Financial Performance

• Mercury products

• Athletic Footwearo Men - largest segment and constituted its core business

o Women - had subpar performance

• Casual Footwear o Men - peaked in 2004, declined since then

o Women - worse-performing line of shoes

Mercury Athletic • Performance

• In late 2006o Didn't fit with WCF

Mercury's size customers brand image

o Determined to sell the business

• Mercury's prospective buyer was Active Gear Inc.

Active Gear Inc.

• Founded in 1965

• Privately held footwear company

• The most profitable firms in the footwear industry

• Beginning 1970so Casual/ recreational footwear o 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

Given Information

• Cost of debt - 6%

• Risk free rate1 - 4.93%

• Risk free rate2- 4.69%

• Expected market return - 9.7%

• Tax rate - 40%

• Beta - 1.6

Question IIs 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 importanto If the cultures drastically differ

Inhibit efficiency Effectiveness of strategic planning.

Diagram

• Diagram 1

Acti

• The revenueso Comparableo Very closely identical

Mercury athletic has lower overhead costso Acquisitiono More leverage with producers.

Question IIReview the projections formulated by Liedtke. Are they appropriate? How would you recommend modifying them?

• CAGR = 9.7%o Expected market return V.S. CAGRo CAGR has no risk in formula

• 3.0% revenue growth end of time

Question IIIEstimate 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.

Free cash flows cont.

• We repeated the same process for cash flow years 2008 -2011.

o 2008 - $26,729o 2009 - $22,098o 2010 - $25,473o 2011 - $29,544

Cost of Equity

CAPM = KRF1 + β ( KM - KRF2 )4.93%+ 1.6 (9.7%-4.69%)

= 12.95%(CostS)

*assumption CAGR

WACC

WACC = WD costD (1 - T) + Ws costs

0.2 [0.06 ( 1- 0.4)] +0.8 (0.1295)

=0.0072 + 0.1036 =11.08%

Terminal Value Formulas

VN= FCFn ( 1 +g FCF ) WACC-gFCF

= $29,544 ( 1 + 0.03) 0.1108 - 0.03

= $376,613

Enterprise Value

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.

ANY QUESTIONS?!

Thank you!