Case # 1: Valuation
“ Mercury Athletic Footwear : Valuing the Opportunity”
Mercury Athletic Footwear
1. Is Mercury an appropriate target for AGI? Why or why not?
There is sufficient evidence to suggest it will be advantageous for AGI to acquire Mercury Athletics. Factored into the decision is the lack of information on the work culture both firms currently possess. Culture is important, because if the cultures drastically differ, it could possibly inhibit efficiency and effectiveness of strategic planning. If one culture empowers employees, while the other ...view middle of the document...
The intended purpose of calculating the market premium is to estimate the additional risk or cost between the market risk and the risk free rate. Market index is the representation of systematic risk. CAGR although a substitute, only accurately calculates a smooth risk of return, but does not have any risk variables in the formula. Therefore the market risk premium only in this case is only a representation of the possible expected return, and is not a calculation of risk.
An assumption we also point out as possibly manipulating the calculated value is the assumption of 3 percent revenue growth. When using the discounted cash flow approach, we estimate the terminal value. The terminal value is an estimation of a value at a future point in time using the estimated growth and discounted cash flows to infinite. Calculating a value with the assumption that there is fixed revenue growth implies there will be zero change to revenue until the end of time, regardless of economic, political, or competitive conditions. If this assumption of 3 percent growth is inaccurate, and due to the terminal value estimating the values from a point in time to an infinite amount of years, we will have an infinite amount of inaccuracy or deviation from the actual value if we were able to compare the actual values over an infinite amount of years. The team finds this to be an appropriate estimation, but we also understand the limitations and possible inaccuracy of this value, which is a large weight in our enterprise value.
3. Estimate the Value of Mercury using a discounted cash flow approach and the base projections.
Diagram 2: Free Cash Flows
| | |2007 |2008 |2009 |2010 |2011 |
| |Revenue |$479,329 |$489,028 |$532,137 |$570,319 |$597,717 |
|Less: |Operating Expenses |$423,837 |$427,333 |$465,110 |$498,535 |$522,522 |
|Less: |Corporate Overhead |$8,487 |$8,659 |$9,422 |$10,098 |$10,583 |
| |EBIT |$47,005 |$53,036 |$57,605 |$61,686 |$64,612 |
|Less: |Taxes (EBIT*40% tax |$18,802 |$21,214 |$23,042 |$24,674 |$25,845 |
| |rate) | | | | | |
| | |$28,203 |$31,822 |$34,563 |$37,012 |$38,767 |
|Add: |Depreciation |$9,587 |$9,781 |$10,643 |$11,406 |$11,954 |
|Less: |Capital Expenditures |$11,983 |$12,226 |$13,303 |$14,258 |$14,943 ...