Mercury Athletics
Mercury Athletic Footwear
Ashutosh Dash
Firm Value & Cash Flow
Unlevered Free Cash Flow
• FCF = EBIT (1-t) + DEP - ∆NWC - CAPEX
Or
• FCF = EBIT (1-t) - ∆NFA - ∆NWC
• EBIT (1-t) or NOPAT is debt free income
• Where do we pick up the interest tax shield?
• Estimating FCF requires
– Developing a reorganized Balance Sheet
A Complex Reorganized Balance Sheet
Assets
Excess Cash
NWC
Liabilities
000 Debt
104117 Others
000
000
NFA (PPE)
32618 Hybrids
Others
77332 Equity
214067
214067 Capital
214067
Net Assets
000
Reorganized B/S - Implications
• Should Excess Cash be Considered in FCF
– Non-Operating Asset
– May be added to operating cash flow value
– May be considered for net value of debt
•
•
•
•
What are other Assets & Liabilities?
How are these assets treated in FCF?
Other Assets & Liabilities are netted
∆NOA are adjusted like NWC and NFA
Calculation of FCFF
2007
2008
2009
2010
2011
Revenue
479329 489028 532137 570319 597717
Operating Expenses
423837 427333 465110 498535 522522
Corporate Overhead
8487
8659
9422
10098
10583
EBIT
47005
53036
57605
61686
64612
Taxes
18802
21214
23042
24674
25845
Depreciation
9587
9781
10643
11406
11954
Change in WC
4567
2649
9805
8688
6233
11983
12226
13303
14258
14943
0
0
0
0
0
21240
26728
22098
25472
29545
CAPEX
NOA
Unlevered Cash
Flow
Cost of Capital
• Estimate opportunity cost of capital
– Based on comparable company information
– Capital structure which changes over time
• Un-levering and Re-levering Beta
• A word of caution in calculating Beta:
– Comparable Firm based on characteristics
– Anomalous asset beta excluded as outlier
– Range of asset betas in sensitivity analysis
Un-levering Beta
D/E
E/V
Equity Beta
Asset Beta
E/V
Asset Beta
0.299
0.769823
2.68
2.06
0.85
2.27
-0.076
1.082251
1.94
2.10
1.05
2.03
0.322
0.75643
1.92
1.45
0.84
1.61
0.497
0.668003
1.12
0.75
0.77
0.86
0.217
0.821693
0.97
0.80
0.88
0.86
0.343
Ashutosh Dash
Firm Value & Cash Flow
Unlevered Free Cash Flow
• FCF = EBIT (1-t) + DEP - ∆NWC - CAPEX
Or
• FCF = EBIT (1-t) - ∆NFA - ∆NWC
• EBIT (1-t) or NOPAT is debt free income
• Where do we pick up the interest tax shield?
• Estimating FCF requires
– Developing a reorganized Balance Sheet
A Complex Reorganized Balance Sheet
Assets
Excess Cash
NWC
Liabilities
000 Debt
104117 Others
000
000
NFA (PPE)
32618 Hybrids
Others
77332 Equity
214067
214067 Capital
214067
Net Assets
000
Reorganized B/S - Implications
• Should Excess Cash be Considered in FCF
– Non-Operating Asset
– May be added to operating cash flow value
– May be considered for net value of debt
•
•
•
•
What are other Assets & Liabilities?
How are these assets treated in FCF?
Other Assets & Liabilities are netted
∆NOA are adjusted like NWC and NFA
Calculation of FCFF
2007
2008
2009
2010
2011
Revenue
479329 489028 532137 570319 597717
Operating Expenses
423837 427333 465110 498535 522522
Corporate Overhead
8487
8659
9422
10098
10583
EBIT
47005
53036
57605
61686
64612
Taxes
18802
21214
23042
24674
25845
Depreciation
9587
9781
10643
11406
11954
Change in WC
4567
2649
9805
8688
6233
11983
12226
13303
14258
14943
0
0
0
0
0
21240
26728
22098
25472
29545
CAPEX
NOA
Unlevered Cash
Flow
Cost of Capital
• Estimate opportunity cost of capital
– Based on comparable company information
– Capital structure which changes over time
• Un-levering and Re-levering Beta
• A word of caution in calculating Beta:
– Comparable Firm based on characteristics
– Anomalous asset beta excluded as outlier
– Range of asset betas in sensitivity analysis
Un-levering Beta
D/E
E/V
Equity Beta
Asset Beta
E/V
Asset Beta
0.299
0.769823
2.68
2.06
0.85
2.27
-0.076
1.082251
1.94
2.10
1.05
2.03
0.322
0.75643
1.92
1.45
0.84
1.61
0.497
0.668003
1.12
0.75
0.77
0.86
0.217
0.821693
0.97
0.80
0.88
0.86
0.343