Mercury Athletic Footwear: Valuing the Opportunity

1055 Words Apr 26th, 2016 5 Pages
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Mercury Athletic Footwear: Valuing the Opportunity

By
Christian Daba
Submitted
To
John Katkish

Background
West Coast Fashions, Inc has decided to sell one of their segments, Mercury Athletic in the context of a broader reorganization. The head of the business development for Active Gear, Inc(AGI), John Liedtke, views this event as a good
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Risk free rate is taken to be 4.69% while the market risk premium is 5.01%. 2. Beta for mercury is calculated by comparison with the companies having similar debt/equity ratio (25%). This beta is used in the calculation of cost of equity afterwards. The equity beta comes out to be 1.12.
Then we can use the following formula to calculate the WACC. The cost of debt is taken to be on an after tax basis to further to account for the depreciation tax shield.
WACC=Cost of debt*1-tax rate*debtValue+Cost of equity*(EquityValue)
The WACC comes out to be 8.96%.
Before moving forward to compute the present value of these cash flows, a terminal value is required to forecast the long term value of the company after 5 years. . Following formula is used to calculate the terminal value.
Terminal Value=Cash Flow at 2011*1+Terminal growth rateWACC-Terminal growth rate
The terminal growth rate is the average growth rates from 2007 to 2011. Combining with previous cash flows of 5 years, the whole future cash flows are:

Finally, we can calculate the NPV of these cash flows as the enterprise value of Mercury, which is $375,402,473.
For calculations of the acquisition price, the P/E is taken to be 8.6. The acquisition price is calculated by multiplying this value with the historical average of net income. Thus, the acquisition price comes out to be $186,215,800, which is $189,186,673 less than the enterprise value.
Based on my analysis,
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