The last page of the Mercury Athletic case mentions at least two possible sources of value creation not captured in Liedtkes base case scenario: a significant reduction in Mercurys days sales in inventory (DSI) and a possible combination of Mercurys and AGIs women casual lines. A) Using Liedtkes 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. Currently Mercury has no debt in its capital structure.

Base Case Assumptions
Marginal Tax Rate	40.0%
Debt Beta	0.0
Risk Free Rate	4.93%
Market Return	9.93%
Debt/Value ratio	20%
Cost of Debt	6.00%

Comparables	MV Equity	Net Debt	Equity 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	165560	82236	1.12
Victory Athletic	35303250	7653207	0.97
Surfside Footwear	570684	195540	2.13
Alpine Company	1,056,033	300,550	1.27
Heartland Outdoor	1454875	-97018	1.01
Templeton Athletic	397709	169579	0.98

		5-Year Projections by John Liedtke
Mercury's Financial Results	2006	2007	2008	2009	2010	2011
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		0	0	0	0	0
Assumption: The FCF will grow at the constant growth rate of 5% after 2011.

B. Based on your answer in (a), suppose Mercury is going to change its capital structure with a long-term debt of $250,000 in 2006. How does this recapitalization affect the value of Mercury?

C. Describe how you would analyze possible synergies or other sources of value not reflected in Liedtkes base case assumptions.