Mercury Athletic Footwear

Mercury Athletic Footwear

Mercury Athletic Footwear

Question 1

Based on the information in the case study, calculate the value of Mercury Athletic Footwear as an independent firm at the time of the case study using the free cash flow method

In order to expand their business operations, a growing trend today is to acquire another firm, or to merge with another company this has enabled many organizations to gain competitive advantage over their competitors (Weiss, 2008, Pp. 65-67). As Active Gear Company operates in as highly competitive industry thus, it is essential for the organizations to ensure that they critically evaluate the financial performance of the company that is to be acquired by the compare to ensure that the business would be profitable. The Net Income margin for Active Gear Company is calculated as 7.6%, however the industry average is 7.9% in the year 2006 indicating that the company has not been performing earn a higher net income as compared to others in the industry. The ratio has also declined as compared to past years. Thus, it is essential for Active Gear Company to acquire another company for generating higher net income (Hira, 2008, Pp. 1-5).

Before proceeding with the investment it is necessary for Active Gear Company to examine if investing in Mercury Athletic Footwear will generate sufficient cash flow, which should be greater than the amount of investment made, these cash flows will then be discounted to present value, and then Net Present Value will be determined to ensure that the investing in Mercury Athletic Footwear will be profitable. To calculate free cash flow, the formula that can be used is Free cash flow = EBIT (1 - tax) + depreciation - capital expenditure - change in working capital, using the formula the amount of free cash flow for the year 2006 is,

41,933 (1-38%) + 9,506 - (32,618-31,334)-[ (145,470-36,708)-(139,908-35,791)

Thus the amount of free cash flow can be calculated as $29,575 which indicates that the company would generate positive cash flows. In Mercury segment data for 2004-2006 shows that the EBIT margin is 9.8% which is less than industry average this is an important indicator for investor to measure Company's financial health. Liedkte believes that combined business will achieve revenue growth of 2% in the year 2011. However the cash flows can be discounted with discount of 7.65% and growth rate of 3% which is $275,399. This compares the value of investment which is made in the current year to the same value of amount in future (Hira, 2008, Pp. 1-5). If the acquisition price is less than the present value of future cash flows then Active Gear Company should proceed with the investment. Discounted cash flows take into consideration the inflation rate, to determine the impact of time value of money (Weiss, 2008, Pp. 65-67).

Question 2

If you were John Liedtke/Active Gear what would your negotiating tactics be? What is the highest price you would be willing to pay? Explain your answer clearly

It is necessary for the businesses to determine ...