Instruction for FIN6104 Case 3
Please read the case and answer the following questions to the best of your ability. As a team, you should submit one report for this case study. For the entire course, there will be three case studies in total and hence three report submissions. In the end of the semester, your team will deliver a presentation based on only one of the cases. (We will decide case allocations in due time.)
Case Information
Title: Mercury Athletic: Valuing the Opportunity
Abstract: In January 2007, West Coast Fashions, Inc., a large designer and marketer of branded apparel, announced a strategic reorganization that would result in the divestiture of their wholly owned footwear subsidiary, Mercury Athletic. John Liedtke, the head of business development for Active Gear, a mid-sized athletic and casual footwear company, saw the potential acquisition of Mercury as a unique opportunity to roughly double the size of his business. The case uses the potential acquisition of Mercury Athletic as a vehicle to teach students basic DCF (discounted cash flow) valuation using the weighted average cost of capital (WACC).
Questions
Please keep in mind that there are often times multiple “correct” answers, depending on the assumptions you make. You need to justify your answers and assumptions. Please note that your report or presentation should not be structured in a simple manner to just answer these questions one by one. Instead, you should attempt to make a self-sufficient report (presentation) in the sense that a reader (audience)—who has not seen the case or this instruction—will be able to follow your report (presentation) seamlessly. For example, you will probably need a clear and concise introduction to help readers more quickly and better understand the goal of this report; you will probably want to make sure the paragraphs are logically linked. Furthermore, the scope of your project should not be limited by these questions; feel free to include additional discussions on other issues that you find interesting pertaining to the case.
1) What are some of the reasons why WCF would want to divest Mercury Athletic, and what are some of the reasons why Active Gear Inc. would want to acquire it?
2) Prepare a cash flow forecast for Mercury Athletic under the base case assumptions and projections outlined in the case.
Note 1: for networking capital, the case also includes data for prepaid and accrued expenses; NWC = Cash + Inventory + A/R + Prepaid Exp – A/P – Accrued Exp.
Note 2: to estimate a terminal growth rate, there are several methods available. One way of computing the growth rate is to multiply the “reinvestment rate” of the firm by the “return on capital” of the firm. The reinvestment rate can be calculated as CAPEX plus net working capital investments (minus depreciation) in the final year, over the final year’s after-tax EBIT; the return on capital can be calculated as after-tax EBIT divided by net assets in the final year.
3) Prepare a WACC estimate for Mercury Athletic under the base case assumptions and projections outlined in the case.
4) Are there any specific components of the cash flow projections outlined in the case that seem inappropriate? Please explain why you think they do not seem reasonable.
Report Submission & Presentation
You should submit the following files on Blackboard BEFORE December 08, 2024 (Sunday), 23:59. Please delegate the job of submitting to only one group member (i.e., each team should submit only once).
1) A PDF file that includes the body of your report and all necessary exhibits (such as tables or figures) to support the report. Your report should not exceed 3 pages (not including exhibits). The page limit is intended to force you to communicate succinctly and clearly; do not interpret it as suggesting that this project requires little work. The report should be clear, concise, but with sufficient detail such that it can be critiqued. You should include a cover page with your team number and all members names.
2) An Excel file that contains your models, detailed analysis, and other supporting data if any. Make the first worksheet (tab) of this file a cover page that includes your team number and all members names. The structure of this Excel file must be user friendly and please include necessary notes to explain what you have done.
Name the files using the following format such as “FM_Group_1.pdf” or “PT_Group_1.xlsx.”
Presentation
Your presentation will be 20 minutes. Please make sure it will not exceed 20 minutes. All group members must participate in the presentation and be prepared to answer questions (including but not restricted to questions about the business, industry, and your model).
Grade
The entire group project (3 reports + 1 presentation) will count 30% of your final grade.
For each report, a full mark of 5 points will be determined based on the overall quality of the report (including the main body, exhibits, and Excel models). For the presentation, 10 points will be determined based on the overall quality of your group’s performance. Lastly, we will have 5 points from peer evaluations to disincentivize free-riders: your contribution to this group project will be evaluated by each of your team members anonymously, on a basis of 5 points, and your peer evaluation score will be the average score.