Mercury Athletics Footwear: Corporate Valuation - Essay Example

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Mercury Athletics Footwear: Corporate Valuation Introduction Following the information provided in the case study, here is the calculation of the value of Mercury Athletic Footwear as an independent firm using the free cash flow method…
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Mercury Athletics Footwear: Corporate Valuation
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Download file to see previous pages 0 76,566.00 Less 40% Cost Saving (Tax) 18,802.00 21,214.40 23,042.00 24,674.40 25,844.80 Capital Expenditure 11,983.00 12,226.00 13,303.00 14,258.00 14,943.00 Changes in working capital 4,569.00 2,648.00 9,805.00 8,687.00 6,234.00 Net Cash Flow 21,238.00 26,728.60 22,098.00 25,472.60 29,544.20 Terminal value Discount Factor 12% Growth rate (2%) Present Value of Net Cash Flow $18,963 $21,308 $15,729 $16,188 $16,764 Present Value of All Cash Flows (A) $88,952 Terminal Value: 2012 Net Cash Flow $30,135 2011 Present Value $301,351 2007 Present Value (B) $170,995 Value of Mercury = A+B $259,946         Considering Mercury from 2007–2011, there is growth in earnings and using the free cash flow method it is evident that the Net profit value is positive. Additionally, acquiring Mercury may lead to large market share which may eventually result into huge revenue. Using a discount rate of 12% seems healthy because it takes into consideration issues of risks and inflation which may interfere with the business operations in future. Any discount rate below that may mean less risks and inflation making it riskier when something happens to the expected income in future. Otherwise, concerning growth rate, I used 2% as per John’s decision (Luehrman & Heilprin, 2009, p. 1-14). 2 By analyzing the information provided in 2006 just before AGI plans of acquisition, it is clear that Active Gear has higher revenues of $470,286 million while Mercury athletics’ revenue is $ 431, 121millionrepectively. Looking at the operating income, Active Gear enjoys $60.4 while Mercury Athletic has $42.299 operating incomes respectively. Additionally, the revenue growths for the two companies are provided as 2-6% for Active Gear and 12.5% for Mercury respectively. This information is vital in negotiation and therefore John will use them while negotiating for acquisition of Mercury athletic (Luehrman & Heilprin, 2009, p. 1-14). . Just by considering the general performance of the two business entities, Active Gear, Inc. has enough capabilities to acquire Mercury Footwear due to AGI’s high revenue and operating income. Percentage difference in revenue between the two companies may be used by John as representing the lack in both the companies. Acquisition may mean that Mercury’s revenue will improve because they will be operating on the wings of AGI whose revenue is already high. The acquisition of Mercury Athletic Footwear would offer a good competitive advantage to AGI due to the competition that exists in athletic and casual footwear industry (Luehrman & Heilprin, 2009, p. 1-14). It is apparent that AGI will gain a bigger size and increases her growth as short as possible thereby increasing her leverage as a result of wide contract manufactures in China and client base. Furthermore, there are benefits that accrue due to economies of scale by making the company more powerful while negotiating contracts. GI makes more profit and revenues in the industry more than Mercury hence giving AGI an advantage over Mercury. Acquisition would therefore mean that there would be an ...Download file to see next pagesRead More
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