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Harvard Business Cases Valuation

Harvard Business Cases Valuation. Fin 321 Dr . Ghosh Adriana Nava Kristie Tillett Grace Tung Eddie Pinela Zhibin Yang. Outline . Introduction Background History Question I : Is Mercury an appropriate target? Question II: Are the given projections appropriate?

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Harvard Business Cases Valuation

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  1. Harvard Business CasesValuation Fin 321 Dr. Ghosh Adriana Nava Kristie Tillett Grace Tung Eddie Pinela Zhibin Yang

  2. Outline Introduction Background History Question I : Is Mercury an appropriate target? Question II: Are the given projections appropriate? Question III: Estimate the value of Mercury Given information Formulas Detailed calculations Conclusion

  3. West Coast Fashions Inc. • WCF is a large designer and marketer of men's and women's branded apparel • WCF is planning for a reorganization which includes the shedding of its footwear division, Mercury Athletic

  4. Athletic and Casual Footwear Industry • Competitive • Casual segment • Athletic segment • Lifecycle • 12-16 months • Import taxes and tariffs • China

  5. Mercury Athletic • Branded athletic / Casual footwear • Mercury was founded by Daniel Fiore • $431.1 million / $51.8 million • Financial Performance • Mercury products • Athletic Footwear • Men - largest segment and constituted its core business • Women - had subpar performance • Casual Footwear • Men - peaked in 2004, declined since then • Women - worse-performing line of shoes

  6. Mercury Athletic • Performance • In late 2006 • Didn't fit with WCF • Mercury's size • customers • brand image • Determined to sell the business • Mercury's prospective buyer was Active Gear Inc.

  7. Active Gear Inc. • Founded in 1965 • Privately held footwear company • The most profitable firms in the footwear industry • Beginning 1970s • Casual/ recreational footwear • Age 25-45 • Sold by 5700 retail stores • Outsourcing • However, the company was much smaller than many competitors and AGI's executives felt its small size was becoming a competitive disadvantage

  8. Given Information • Cost of debt - 6% • Risk free rate1 - 4.93% • Risk free rate2- 4.69% • Expected market return - 9.7% • Tax rate - 40% • Beta - 1.6

  9. Question I Is mercury an appropriate target for AGI? Why or why not? • Estimates based on assumptions • Sufficient evidence to suggest it will be advantageous for AGI to acquire Mercury Athletics. • Culture is important • If the cultures drastically differ • Inhibit efficiency • Effectiveness of strategic planning.

  10. Diagram • Diagram 1 Acti • The revenues • Comparable • Very closely identical • Mercury athletic has lower overhead costs • Acquisition • More leverage with producers.

  11. Question II Review the projections formulated by Liedtke. Are they appropriate? How would you recommend modifying them? • CAGR = 9.7% • Expected market return V.S. CAGR • CAGR has no risk in formula • 3.0% revenue growth end of time

  12. Question III Estimate the value of Mercury using a discounted cash flow approach and Liedtke’s base case projections. Please show your work, and explain any assumptions that you make.

  13. Free cash flows cont. • We repeated the same process for cash flow years 2008 -2011. • 2008 - $26,729 • 2009 - $22,098 • 2010 - $25,473 • 2011 - $29,544

  14. Cost of Equity CAPM = KRF1 + β ( KM - KRF2 ) 4.93%+ 1.6 (9.7%-4.69%) = 12.95% (CostS) *assumption CAGR

  15. WACC WACC = WD costD (1 - T) + Ws costs 0.2 [0.06 ( 1- 0.4)] +0.8 (0.1295) =0.0072 + 0.1036 =11.08%

  16. Terminal Value Formulas VN=FCFn ( 1 +g FCF ) WACC-gFCF = $29,544 ( 1 + 0.03) 0.1108 - 0.03 = $376,613

  17. Enterprise Value

  18. Conclusion Based on enterprise value $359,653 as well as increasing market share in manufacturing leverage we believe that AGI should go through with the acquisition at the enterprise value price.

  19. ANY QUESTIONS?! Thank you!

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