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A significant reduction in Mercury's days sales in inventory (DSI) and a possible combination of Mercury's and AGI's women casual lines. Using Liedtke's base case

A significant reduction in Mercury's days sales in inventory (DSI) and a possible combination of Mercury's and AGI's women casual lines. 

 

  1. Using Liedtke's base case projections and the comparables' market information, estimate the value of Mercury using a discounted cash flow approach without considering any possible synergy effect.  

  2. Currently Mercury has no debt in its capital structure.  

 

Base Case Assumptions
Marginal Tax Rate40.0%
Debt Beta0.0
Risk Free Rate4.93%
Market Return9.93%
Debt/Value ratio20%
Cost of Debt 6.00%

 

ComparablesMV EquityNet DebtEquity Beta
D&B Shoe $          420,098  $       125,422 2.68
Marina Wilderness       1,205,795        (91,559)1.94
General Shoe Corp          533,463        171,835 1.92
Kinsley Coulter 165560822361.12
Victory Athletic3530325076532070.97
Surfside Footwear5706841955402.13
Alpine Company       1,056,033        300,550 1.27
Heartland Outdoor 1454875-970181.01
Templeton Athletic3977091695790.98

 

 

  5-Year Projections by John Liedtke
Mercury's Financial Results200620072008200920102011
Consolidated Revenue $479,329  $489,028  $532,137  $570,319  $597,717 
Divisional Operating Expenses  423,837  427,333  465,110  498,535  522,522 
Corporate Overhead  8,487  8,659  9,422  10,098  10,583 
Depreciation  9,587  9,781  10,643  11,406  11,954 
Change in Working Capital  $4,569  $2,648  $9,805  $8,687  $6,234 
Capital Expenditures  11,984  12,226  13,303  14,258  14,943 
Change in Other Assets  -    -    -    -    -   
Change in Other Liabilities 00000
Assumption:   The FCF will grow at the constant growth rate of 5% after 2011.

 

Based on your answer in (a), suppose Mercury is going to change its capital structure with a long-term debt to value ratio of 30% (10% higher than the base case scenario) from 2011 onward.  


1) The interest expense to the new capital structure will reduce the net income after tax 

2) How does this recapitalization affect the value of Mercury?

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