Mercury Athletic Footwear Case Solution 116s4y

Q1 AGI 470,286 Casual footwear

Revenue Advantage department

Mercury 431,121 Athletic footwear

Mercury advantage department Revenue of each department Revenue of each department/total avenue

Men’s athletic

Men’s casual

Women’s athletic

Women’s casual

219,093

51,663

123,563

36,802

0.51

0.12

0.29

0.09

Q2 a.WACC Assumption:

d  0

D  20% DE rd  6% Calculation: 1.cause

d  0 ,

use

CAPM

rm  rf  9.7%  6%  1.7%

2.Under

u  Put all average

constant

rd  r f   d   rm  rf 

model,

debt-equity

ratio

assumption,

D E d  e DE DE ,

 e from

exhibit 3 into the formula, we can get

 u of the industry is 1.28.

3.Use 4.use

D D  e   1   u  d E E  CAPM

 u for

,

we

then

rf  6%

know

5. 6.Under



can calculate e of Mercury, which is 1.6 model, cost of equity

 e from

pre-specified

debt

amount

assumption,

exhibit 3 into the formula, we can get

 average u of the industry is 1.37. 7.Use 8.use

D D   e   1   1 -  c    u  1 -  c   d E E  CAPM

model,

 u for

9. b.



we

know

that

each company, and the

can calculate e of Mercury, which is 2.61 cost of equity is

re  rf   e   rm  rf   6%  2.611.7%  15.67%

WACC 

is

D D    rd 1   c    1    re  10.25% DE DE 

1 -  c  D   E u   d 1 -  c  D  E 1 -  c  D  E e ,

Put all

that

each company, and the

re  rf   e   rm  rf   6%  1.6  1.7%  11.91%

WACC 

,

D D    rd 1   c    1    re  13.26% DE DE 

FCFF=EBIT(1-tax rate)-(ital expenditure-depreciation)-change in non-cash working capital 2007 2008 2009 2010 2011 Consolidate d Revenue 479329 489028 532137 570319 597717 Less: Operating Expenses* 423836 427333 465110 498535 522522 Less: Corporate Overhead 8487 8659 9422 10098 10583 Consolidate d Operating Income 47006 53036 57605 61686 64612 tax 0.4 net income 28203 31822 34563 37012 38767 less:Estima ted Capital Expenditur es 11,983 12,226 13,303 14,258 14,943 plus:Estima ted Depreciatio n 9,587 9,781 10,643 11,406 11,954 less:DNWC 4567 2649 9805 8687 6233 FCFF 21240 26727 22097 25473 29545 DNWC calculation process is added to the appendix. C. Long-term growth rate We know that

GR  reinvest  rate  ROI 

 netcapex  nwc  EBIT 1   c   0.5462  0.1170 EBIT 1   c  BVofasset

Use the information of 2011,then GR=6.39%, assume that this is the long-term growth rate

FCFF2011 

FCFF20111  GR  29545(1  6.39%)   814324 WACC  GR 10.25% - 6.39% ,Under

Terminal value= constant debt-equity ratio assumption. TV=457539,Under pre-specified debt amount assumption. d. Value the company:

V2006 

2011

CFt

 1  r 

t  2007

year CF

t



TV (1  r ) 5

2007 21240

2008 26727

2009 22097

2010 25473

TV

2011 29545 457539 814324

or

V2006=574908,Under constant debt-equity ratio assumption. Or =315774,Under pre-specified debt amount assumption. Q3 重点考虑收购之后的影响， EG. Double the revenue, CF increase, V increase

appendix: Cash Used in

2006 10,676

2007 4,161

2008 4,195

2009 4,566

2010 4,894

2011 5,130

Operations s Receivable Inventory Prepaid Expenses Total Current Assets s Payable Accrued Expenses Total Current Liabilities NWC DNWC

45,910 73,149

47,888 83,770

48,857 85,465

53,164 92,999

56,978 99,672

59,715 104,460

10,172

14,474

14,767

16,069

17,222

18,049

139,908

150,293

153,284

166,798

178,766

187,354

16,981

18,830

18,985

20,664

22,149

23,214

18,810

22,778

22,966

24,996

26,792

28,081

35,791 104117

41,609 108684 4567

41,951 111333 2649

45,659 121138 9805

48,941 129826 8687

51,295 136059 6233