7/23/2019 Mecury

1/7

B52.FIN.448 Advanced Financial Management

Professor Roni Kisin

Mercury AthleticsFootwear Case

Group Members:Chiang Ming Rui

Connie Li Joe Marshall

Ivan Yong

7/23/2019 Mecury

2/7

7/23/2019 Mecury

3/7

Question 1Estimate the value of Mercury using a DCF. Use Liedtkes base case pro ections and assumptions as astarting point. E!plain your valuation steps along the "ay. #tate and motivate any and all assumptionsyou make or change.

Using Liedtkes base case pro ections$ "e "orked back"ards to identify if any of his "orkingassumptions "arranted any changes based on the information that the case provided. %&efer to E!hibits'

Assumptions Foot"ear is a very "ell established mature industry and "ill therefore gro" at a rate near that of

the general economy at (.))* +ll forecasts are made under the assumption that ,-) corresponds to ()) +ll pro ections and forecasted financial data provided in the case are reasonable conclusions

based on the economic climate and indicators under "hich the firm operates.,here are no synergies or increased efficiencies that come about as a result of the combination ofthe t"o firms.+ three/year rolling average of historical e!penses as a percentage of revenue is a relativelyaccurate barometer of e!pected future e!penses.

+ll firms are sub ect to a 0)* corporate ta! rate. ,he &isk Free &ate is assumed to be 0.1)* based on an appro!imate figure gleaned ,/2ond

&ates during the time period in 3uestion Market &isk 4remium set e3ual to 1.))* based on historical returns

Methodology

5. Calculate the estimated 6et 7orking Capital for Mercury utili8ing the statistics that "ere provided in the case under e!ample 9.

o 6et 7orking Capital- Current +ssets/ Current Liabilitieso Current +ssets- +ct. &eceivable :;nventory 4repaid E!penses/o Current Liabilities- +ct. 4ayable +ccrued E!penses Determine the individual free cash flo"s of each segment "ith Mercury +thletic

Foot"ear o Estimate &evenue and Cost of E balance the previous period/ 44>E balance at theend of this period'

7/23/2019 Mecury

4/7

,his figure "as then multiplied by the average 44>E balance over the period to forecast thatyears depreciation e!pense

Depreciation "as subtracted to reach E2;,o ,a! e!pense "as subtracted from the E2;, figure$ and "as estimated using a figure e3ual

to ?@* of E2;, in reaching 6et Aperating 4rofito ,he Free Cash Flo" e3uation is then completed using the e3uation

FCF-6A4+,: Estimated Depreciation/ Change in 6et 7orking Capital/ Capital E!pendituresChanges in Ather Liabilities

Capital E!penditure estimates "ere gleaned from E!hibit 9B Mercurys forecasted data. Changes in other liabilities "as estimated to be 8ero

over the period in 3uestion FCF for the periods in 3uestion e3ual

o ())9B 5?$11@.95o ())@B (($@90. 5o ()) B 5@$ ) .

o ()5)B (5$?@ .0o ()55B (1$?)1. @

?. Determine the Cost of E3uity of the Firm Determine a set of comparable companies to use in estimating the e3uity 2eta of the firm Mercury +thletic Foot"ear Firm 4rofile

o istorical E2;, Margin bet"een @.9/ .@*o ()* ,arget Leverage$ meaning (1*$ DBE &atioo L,M &evenue- 0?5$5(5 %;n ,housands'o 2ased on these figures the three firms that most closely resemble Mercury +thletic

Foot"ear are insley Coulter 4roducts$ +lpine Company$ and #urfside Foot"ear.

istorical Levered 2etas of firms are unlevered using the formula 2eta=%5:,a!&ateG%D=E' to reduce the effects of financing decisions by the comparable firms$ and areaveraged to find the mean unlevered beta of the comparable firms

Unlevered 2eta is relevered to fit the target DBE ratio of (1* Cost of E3uity is found to be 55.9@* utili8ing the C+4M$o &e-&f:2eta%&m/&f'o &f-0.1)*o Levered 2eta of the Firm- 5.01o &m/&f-1.))*

0. Find the 7eighted +verage Cost of Capital by utili8ing the 7+CC Formula7+CC- re%E=+':rd%D=+'%5/.0'7+CC-5).50* in this case utili8ing a cost of debt of .))* as "as

provided in the case0. Estimate the ,erminal Halue of the firm utili8ing the e3uation ,erminal Halue- Final 4ro ected FCF %5:Estimated

7/23/2019 Mecury

5/7

7+CC-5).50*. Discount all of the pro ected cash flo"s including the ,erminal Halue utili8ing the present value

formula 4H- #um%Cash Flo"s=%5:Cost of Capital'I6'.. #um the cash flo"s to find the 6et 4resent Halue of the firms cash flo"s.

64H- 4H%FCF':4H%,erminal Halue'

64H- (1($@51.@9$ meaning that this is the present value of all the firmse!pected earnings priced in todays money

. Conduct a sensitivity analysis to determine the models sensitivity to both discount rates andterminal value.

7/23/2019 Mecury

6/7

Question 2o" "ould you analy8e the possible synergies or other sources of value not reflected in Liedtkes base

case assumptionsJ ,his is a 3ualitative 3uestion only and should not take up more than half a page.

,here are a fe" possible areas of synergy and other sources of saved value that are not reflected inLiedtkes base case assumptions. 2y ac3uiring Mercury and consolidating it under +ctive

7/23/2019 Mecury

7/7

E !i"its

E !i"it A

E !i"it B