Mercury Athletic: Valuing the Opportunity

Topics: Modigliani-Miller theorem, Investment, Basic financial concepts Pages: 4 (1043 words) Published: April 26, 2012
The background of this paper we need to mention is that West Coast Fashions, Inc. (WCF), a large designer and marketer of branded apparel announced a strategic reorganization calling for a divestiture of certain assets, and one of the divisions it intended to shed was Mercury Athletic, its wholly owned footwear subsidiary. John Liedtke, the head of business development for Active Gear, Inc. (AGI), a privately held athletic and casual footwear company, contemplated an acquisition opportunity of Mercury that would significantly improve his business. So, he wanted to evaluate this opportunity. This paper introduces the basic situation and feathers of current athletic and casual footwear industry and raises that active management of inventory and production lead times are critical success factors. And then talks about the history, marketing, products and relate revenue and income of AGI, especially mentions its financial policy and performance. In addition, the case researches the history of Mercury, analyzing its products, production and operations, financial performance, and development of four main segments. Last but not least, the research tells us that Liedtke used base case assumptions to value Mercury, and also wanted to consider the value of possible synergies as well.


Note: EBIT equals to the consolidated operating income, and the tax rate is 40%.

Cost of equity, cost of debt, WACC and the leverage effect
(1) Use 5-year U.S. Treasury obligation yield 4.69%, as the riskless rate for the period would correspond with the 5-year period of foreseeable cash flows. (2) For risk premium = expected market return - riskless rate, we can find in Exhibit 3 that the compound annual growth return (CAGR) 9.7% as the expected return from the market. (3) Because Liedtke estimated that the Mercury has the same degree of leverage of AGI currently used, which is 20%, debt divided by the market value of AGI's invested capital, the...
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