Summary
The background of this paper we need to mention is that West Coast Fashions, Inc. (WCF), a large designer and marketer of branded apparel announced a strategic reorganization calling for a divestiture of certain assets, and one of the divisions it intended to shed was Mercury Athletic, its wholly owned footwear subsidiary. John Liedtke, the head of business development for Active Gear, Inc. (AGI), a privately held athletic and casual footwear company, contemplated an acquisition opportunity of Mercury that would significantly improve his business. So, he wanted to evaluate this opportunity.
This paper introduces the basic situation and feathers of current athletic and casual footwear industry and raises that active management of…show more content… And WACC will increase.
Growth Rate and Terminal Value It is assumed that after 2011 the Mercury will continue to grow with a stable growth rate. The average FCFF growth rate for the 5 years (2007-2011) was calculated at about 24%; however, it is not believed that this growth rate could be sustained in perpetuity. So the more modest growth rate of 5% assumed is more appropriate. And the cost of capital in stable growth is 10.719%. So, the FCFF in the first year after 2011 will be computed at 29780.2*(1+0.05)=31269.21. And the terminal value of the firm is FCFF/(Cost of capital in stable growth-Growth rate)=31269.21/(10.719%-5%) = 546760.0979 Present value of the terminal value: 546760.0979/(1.13*1.13*1.13*1.13*1.13)=296759.4757 In addition, we can also assume that the acquisition price can be determined using average P/E of public footwear companies multiply the average historical net income of Mercury, which means that the acquisition price is 13.8*【(19889+19072+25998)/3=298811.4
Synergy Assume that the Days sales in Inventory (DSI) will be improved to current Active Gear level, about 42.5(Table 1). Because DSI is computed as end-of –year inventory/(revenue/360), so that end-of-year inventory=(revenue/360)*DSI
