Mercury Athletic: Valuing the Opportunity Essay examples

1035 Words Apr 16th, 2012 5 Pages
Summary
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
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Also using the average tax rate of 40%, we can estimate the unlevered beta. Unlevered beta = 1.5578/[1+(1-0.4)*0.249]=1.355316 Levered beta = 1.355316[1+(1-0.4)*0.25]=1.558613 After-tax cost of debt = 0.06*(1-0.4)=0.036=3.6%
Cost of equity = riskless rate + Beta (Risk premium) = riskless rate + Beta (riskless rate – expected market return) = 4.69%+ 1.558613*(9.7%-4.69%)=0.124987=12.4987%
WACC= Cost of Equity* Weight + After-tax Cost of Debt* Weight = 12.4987%*(1-20%)+3.6%*20%=0.10719=10.719%

If the leverage increases from expected level, D/C will increase, the levered beta will increase, the cost of equity will increase, the after-tax cost of debt will keep the same. In addition, the weight of the after-tax cost of debt will increase and the weight of the cost of equity will decrease. It looks like that it is difficult to determine how WACC will change. However, according to the Figure 3-8 about the effects of capital structure in Chapter 15, we can find that when the debt ratio is 40%, WACC reaches the minimum value, so in this case, when the leverage change from 20% to 40%, WACC will decrease, and when the leverage bigger than 40%, WACC will increase.
On the other side, if the leverage decrease from
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