Mercury Athletic Footwear Case

1280 WordsDec 7, 20146 Pages
Mercury athletic footwear Group 7 Contents Executive Summary & Overview of Problems 3 Analysis on Mercury acquisition 4 1. Reasons why Mercury is an appropriate target for AGI 4 2. Estimation the value of Mercury based on discounted cash flows and Liedtke’s base case projections. 4 a. Estimation of the weighted average cost of capital 5 b. Estimation of the free cash flows from 2007 to 2011 5 c. Estimation for long-term growth rate and estimate the terminal value 5 d. Estimation value of Mercury based on estimates from (a) to (c) 6 3. Synergy Effects of the Acquisition 6 Executive Summary Great pressure from suppliers and competitors caused some deterioration of basic performance for AGI during 2004–2006. Two main problems are…show more content…
b. Estimation of the free cash flows from 2007 to 2011 Using the data provided in Exhibit 1, we can get free cash flow of year 2007-2011 would be $21.24 million, $26.73 million, $22.10 million, $25.47 million, and $29.54 million respectively. The computation is showed in Exhibit 1($ in thousands). 2007 2008 2009 2010 2011 Operating income 47005 53036 57605 61686 64612 EBIT*(1-T) 28203 31821.6 34563 37011.6 38767.2 Depreciation 9587 9781 10643 11406 11954 Capital expenditure 11983 12226 13303 14258 14943 Change in net working capital 4568 2648 9805 8687 6234 Free cash flow 21239 26728.6 22098 25472.6 29544.2 c. Estimation for long-term growth rate and estimate the terminal value First, we use the following equations to calculate growth rates of Mercury during 2007-2011: Growth rate= reinvestment rate * return on investment Reinvestment rate= Then, we can get growth rates of 2007 -2011 are 2.46%, 1.76%, 4.09%, 3.61% and 2.78% respectively. Finally, we take the average growth rate of 2.94% as long-term growth rate. The computation is showed in Exhibit 2($ in thousands). Year 2007 2008 2009 2010 2011 EBIT*(1-T) 1204.2 1204.8 1205.4 1206.0 1206.6 Change in NWC 4568.0 2648.0 9805.0 8687.0 6234.0 Change in fixed asset 2397 2445 2660 2852 2989 Total asset 135089.0 137535.0 140196.0 143049.0 144027.0 Reinvestment rate 24.70% 16.00% 36.06% 31.18% 23.79% Growth rate 2.46% 1.76% 4.09% 3.61% 2.78% To get terminal value, we first calculated free cash flow in 2012. We expect
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