Mercury Athletic Footwear: Valuing the Opportunity

Mercury’s parent company then branched out to complementary line of apparel products. With poor performance, Mercury is being sold off.

The discount rate of acquiring Mercury is also essential to know. Since discount cash flow is a valuation method used to estimate investment opportunities. Its purpose is to estimate money received from an investment and adjust for time value money (Harman (2011). In this case a 12% forecast was estimated and reflected a positive factor toward PV and NPV. There are however, some circumstances where discount cash flow can be a challenge for example, the most prevailing is when cash flow projections increase for each year in the forecast. It is then assumed that a company will mature in such a way that their maintainable growth rates will lean toward long-term rate of economic growth in the long run (Harman (2011). This intern becomes a challenge for the company against unexpected risks.

In order to obtain growth estimates for each year from 2003 to 2012, the data given in Exhibit 1 and Exhibit 6 of the case was used. The growth rate (%) was calculated by looking at the change in revenue from one year to the next starting with year

Suppose Ace, over the last few years, has had an 18 percent average return on equity (ROE) and has paid out 20 percent of its net income as dividends. Under what conditions could this information be used to help estimate the firm’s expected future growth rate, g? Estimate ks using this procedure for determining g.

WACC= (%of debt) (after-tax cost of debt) + (% of preferred stock)(Cost of preferred stock) + (% of common equity) (Cost of common equity)

If the cash flow at the end of 5 years is not expected to grow, i.e., g=0, then the general formula collapses to the PV of a no-growth perpetuity: Terminal Value5 = FCF6 / (k-g) = FCF5 (1+ g)/(k – g) = FCF5 / k

For g, we are given that the dividend has grown from $0.82 to $1.20 in four years. We use the compound interest formula to get the growth rate

Once we obtained the UFCF, the terminal value was calculated in three different ways, treating the pipeline as an asset on our books, finding the value of project if cash flows are received for perpetuity an finding the annuity value of cash flows for 30 years by assuming that after 1992 cash

       Free cash flows are assumed to grow at a constant rate beyond a specified date in order to find the horizon, or terminal, value.

WACC or Weighted average cost of capital is found from a common stock, preferred stock, bonds and different components of debt cost. Signs of increased risk in the market can be found if the WACC increases, which also increases the beta and the rate of return. The WACC is important to know because it gives insight to future funding expenses. If the number is high, it means that the company will have more expenses to fund new projects. If the number is low, funding new projects will be less expensive and easier to complete.

What are the project’s cash flows for the next twenty years? What assumptions did you use? The project’s cash flows for the next twenty years is on the spreadsheet. The assumptions I use is as follows.

After 5-years, a bullet payment to discharge the debt will be made, and hence the terminal value can be estimated using WACC. The terminal value is 4 286,4.

With Beta at 1, the stock price changes in precise tandem with the market, but with Yeat’s beta at 1.5, it is more risky than a group of peer stocks.

WACC = (% of equity x cost of equity) + (% of debt x cost of debt) x (1-Corp

using the weights and costs of debt and equity. The formula used is: WACC = wdkd (1-T) + weke.