Mercury Athletic Footwear

3579 WordsApr 22, 201315 Pages
Mercury Athletic Footwear: Valuing the Opportunity Active Gear, Inc. (AGI) is a privately held footwear company and is contemplating the possibility of acquiring Mercury Athletic Footwear. West Coast Fashions Inc., a large designer and marketer of men’s and women’s branded apparel recently announced that it plans to shed its Mercury Athletic Footwear subsidiary. AGI’s head of business development, John Liedtke, believes acquiring Mercury Athletic Footwear is a good option for the company. Although AGI is currently among the most profitable firms in the footwear industry, it is also much smaller than most of its competitors, which the company’s management views as a competitive disadvantage. During the past three years AGI’s revenue…show more content…
Even with this high WACC the present value of the company is $197,114.71. In Exhibit 3, we assumed that Mercury’s WACC decreased to 4% either due to favorable leverage or credit market conditions. With this WACC the estimated present value of the company is $242,045.03. Another quantitative method we used to value the possible acquisition of Mercury was estimating Mercury’s horizon value based on its excess free cash flow using the Gordon growth model. A company’s horizon value is its value at the end of a certain period. This value can be used as a present value of a company. The basic assumption of the Gordon growth model is that a company will generate free cash flows at a consistent growth rate for an indefinite amount of time. The model uses the following equation: [Free Cash Flow*(1+Growth Rate)/ (WACC-Growth Rate)]+PV of Previous Future Periods’ Cash Flows The free cash flow used in this model is the free cash flow from the future period in which the company is expected to hit its long-term growth rate. The present value of the future periods’ cash flows before the company is expected to hit its long-term growth rate is then added. The result of this equation is the company’s estimated horizon value. A drawback of this method is that a company’s growth rate may vary from year to year and this model may not be able to account for this fluctuation. We chose not to use other horizon value analyses
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