fin 321 case presentation
TRANSCRIPT
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Harvard Business Cases
Valuation
Fin 321
Dr. Ghosh Adriana Nava
Kristie Tillett
Grace Tung
Eddie Pinela
Zhibin Yang
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• Introductiono Background
o History • Question I : Is Mercury an appropriate target?
• Question II: Are the given projections appropriate?
• Question III: Estimate the value of Mercuryo Given informationo Formulaso Detailed calculations
• Conclusion
Outline
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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
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Athletic and Casual Footwear Industry
• Competitive
• Casual segment
• Athletic segment
• Lifecycle
• 12-16 months
• Import taxes and tariffs
• China
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Mercury Athletic
• Branded athletic / Casual footwear
• Mercury was founded by Daniel Fiore
• $431.1 million / $51.8 million
• Financial Performance
• Mercury products
• Athletic Footwearo Men - largest segment and constituted its core business
o Women - had subpar performance
• Casual Footwear o Men - peaked in 2004, declined since then
o Women - worse-performing line of shoes
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Mercury Athletic
• Performance
• In late 2006o Didn't fit with WCF
Mercury's size customers brand image
o Determined to sell the business
• Mercury's prospective buyer was Active Gear Inc.
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Active Gear Inc.
• Founded in 1965
• Privately held footwear company
• The most profitable firms in the footwear industry
• Beginning 1970so Casual/ recreational footwear o 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
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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
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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 importanto If the cultures drastically differ
Inhibit efficiency Effectiveness of strategic planning.
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Diagram
• Diagram 1
Acti
• The revenueso Comparableo Very closely identical
Mercury athletic has lower overhead costso Acquisitiono More leverage with producers.
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Question IIReview the projections formulated by Liedtke. Are they appropriate? How would you recommend modifying them?
• CAGR = 9.7%o Expected market return V.S. CAGRo CAGR has no risk in formula
• 3.0% revenue growth end of time
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Question IIIEstimate 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.
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Free cash flows cont.
• We repeated the same process for cash flow years 2008 -2011.
o 2008 - $26,729o 2009 - $22,098o 2010 - $25,473o 2011 - $29,544
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Cost of Equity
CAPM = KRF1 + β ( KM - KRF2 )4.93%+ 1.6 (9.7%-4.69%)
= 12.95%(CostS)
*assumption CAGR
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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%
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Terminal Value Formulas
VN= FCFn ( 1 +g FCF )
WACC-gFCF
= $29,544 ( 1 + 0.03) 0.1108 - 0.03
= $376,613
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Enterprise Value
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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.
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ANY QUESTIONS?!
Thank you!