Midland Case

1861 Words Apr 8th, 2012 8 Pages
1. Do you think Mercury is an appropriate target for AGI? Why or why not?

Mercury is an appropriate target for AGI. AGI is looking to increase its revenue and profit by utilizing synergies. The initial aim of AGI for acquiring Mercury Athletics is to increase leverage with contract manufacturers and to boost the cooperation with the retailers and distributors. AGI was one of the most profitable and successful companies in the market segment, but the firm’s size remained rather small in comparison with the main competitors. Therefore, with the acquisition of Mercury, AGI planned to build competitive advantage. Besides, the target company had well developed operation infrastructure, impressive labor facilities in China and numerous
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All forecasts shown below, net operating profit after tax (NOPAT) for 2007 to 2011 was derived by subtracting corporate tax from forecasted operating income (tax rate is assumed to be 40%). Forecasted FCF for 2007 to 2011 were calculated after subtracting capital expenditures and changes in working capital from NOPAT and adding depreciation. The FCFs will be used to assess the firm’s PV.

3. Estimate the value of Mercury using a discounted cash flow (DCF) approach and Liedtke’s base case projections. Justify any additional assumptions that you make. In answering this question you should provide a quantitative and detailed analysis of the following parts of the valuation: a. Projected cash flows, including projected capital expenditures and changes in net working capital. b. The appropriate discount rate (assume a market risk premium of 5.0%). c. Various approaches to terminal value (growing perpetuity and multiples-based). d. Sensitivity analysis of the parameters you consider most relevant.

a) Cash Flow Forecasts

Segmented: Men's Athletic: | 2007 | 2008 | 2009 | 2010 | 2011 | Revenue | 251,957 | 282,192 | 310,411 | 335,244 | 352,006 | Less: Operating Expenses | 218,435 | 244,647 | 269,112 | 290,641 | 305,173 | Operating Income | 33,522 | 37,545 | 41,299 | 44,603 | 46,834 | | | | | | | Men's Casual: | | | | | | Revenue | 52,179 | 53,223 | 54,287

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