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10yr Treasury

20.00% Comparables
Debt
20.00%
rUA
5.98%
40.00% EBITDA/Int Exp
80.00%
14.56% 2006 NWC
3.00% rTX
12.37%

Leverage(d/v)
D/V
rD
Tc
E/V
rE
G
WACC

WACC

1
2007

2
2008
62,816.53
53,035.97
53,035.97
21,214.39
31,821.58
9,780.56
12,225.70
111,333.34
2,649.14

4.73%
12.85%
16.7
$

YEAR
EBITDA
EBIT
Unlevered Taxable income
Tax Expense
NOPLAT
+Depreciation
Cap Ex
Net Working Capital
Change in NWC

$
$
$
$
$
$
$
$
$

56,592.32
47,005.74
47,005.74
18,802.30
28,203.44
9,586.58
11,983.23
108,684.19
4,566.95

Unlevered Free Cash Flow


PV
NPV UFCF
Equity
Debt

$
$
$
$
$

21,239.85 $
26,727.30 $
18,902.12 $
21,167.68 $
269,453.27 =Enterprise Value
215,562.62
53,890.65

APV
YEAR
EBITDA
EBIT
Unlevered Taxable income
Tax Expense
NOPLAT
+Depreciation
Cap Ex
Net Working Capital
Change in NWC
Unlevered Free Cash Flow
PV
NPV UFCF
Interest Expense
IETS
PV IETS CF
NPV IETSCF
Enterprise Value
Equity
Debt
leverage

$
$
$
$
$
$
$
$
$

1
2007
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$

56,592.32
47,005.74
47,005.74
18,802.30
28,203.44
9,586.58
11,983.23
108,684.19
4,566.95
21,239.85
18,821.98
255,943.75
3,388.76
1,355.50
1,243.58
26,665.67
282,609.42

$
$

226,087.54
56,668.26
20.05%

$
$
$
$
$
$
$
$
$
$
$
$
$
$

2
2008
62,816.53
53,035.97
53,035.97
21,214.39
31,821.58
9,780.56
12,225.70
111,333.34
2,649.14
26,727.30
20,988.58

$
$
$
$
$
$
$
$
$

104,117.24
9.00%

3
2009
68,247.55
57,604.81
57,604.81
23,041.92
34,562.88
10,642.74
13,303.42
121,138.18
9,804.84
22,097.36
15,574.63

$
$
$
$
$
$
$
$
$
$
$

3
2009
68,247.55
57,604.81
57,604.81
23,041.92
34,562.88
10,642.74
13,303.42
121,138.18
9,804.84
22,097.36
15,377.38

3,761.47 $
1,504.59 $
1,266.38 $

4,086.68
1,634.67
1,262.27

EBITDA/Int Exp
TIE

16.7
13.87

Check Exh 3
assume
From Exh 4

$
$
$
$
$
$
$
$
$
$
$

$
$
$
$
$
$
$
$
$
$
$
$
$
$

4
2010
73,092.71
61,686.33
61,686.33
24,674.53
37,011.80
11,406.38
14,257.98
129,825.57
8,687.39

$
$
$
$
$
$
$
$
$

25,472.81 $
15,977.66 $

4
2010
73,092.71
61,686.33
61,686.33
24,674.53
37,011.80
11,406.38
14,257.98
129,825.57
8,687.39
25,472.81
15,708.44

5
2011
76,565.93
64,611.59
64,611.59
25,844.64
38,766.95
11,954.34
14,942.92
136,058.90
6,233.33
29,545.04 $
16,492.25 $

TV

324,859.57
181,338.94

$
$
$
$
$
$
$
$
$
$
$

5
2011
76,565.93
64,611.59
64,611.59
25,844.64
38,766.95
11,954.34
14,942.92
136,058.90
6,233.33
29,545.04 $
16,145.62 $

309,075.13
168,901.75

4,376.81 $
1,750.72 $
1,240.26 $

4,584.79 $
1,833.91 $
1,191.92 $

78,705.49
31,482.20
20,461.27

TV

Assumptions:
-Although product life cycle is short (1 yr / seasonal a
are long lived and production is done in China, so the
term (10yrs) considering the investment in R&D with
- We assumed the c
rate of 3% after 2011, as the case specifies low grow
and fragmented market
-We calculated rE using the re-levering formula for g
-Fo Interest Expense we chose a EBITDA/Int Exp Ra
Exp for each year since it is not given. then back calc
Dec 2006.
- We used g
EBIT terminal value for calculating interest expense
-Rtx is not equal to Rd since Mercury is not a mature
Rua because it is growing slowly with a high TIE (com
Exh 3). Due to high TIE the risk of interest payments
assume Rtx to be somewhere between Rd and Rtx

cycle is short (1 yr / seasonal as given in the case) the assets


duction is done in China, so the investment in asset is for long
ng the investment in R&D with trends and fashion.
- We assumed the company to be growing at a low
as the case specifies low growth rate - in a highly competitive
et
ng the re-levering formula for growing firm
we chose a EBITDA/Int Exp Ratio and calculated the Interest
ce it is not given. then back calculate the current Debt Value in
- We used growing perpetuity formula for
or calculating interest expense (APV)
d since Mercury is not a mature firm and Rtx is not equal to
wing slowly with a high TIE (compared to comparable firms
E the risk of interest payments is low. For these reasons we
mewhere between Rd and Rtx

Table 1

Casual & Athletic Shoe Companies:


D&B Shoe Company
Marina Wilderness
General Shoe Corp.
Kinsley Coulter Products
Victory Athletic
Surfside Footwear
Alpine Company
Heartland Outdoor Footwear
Templeton Athletic
Average
Active Gear
Mercury Athletic

Days Sales
in Inventory

61.3
39.5
73.2
31.1
50.0
60.0
42.9
58.1
42.5
50.9
42.5
61.1

Mercury Athletic Footwear: Valuing the Opportunity (HBS Case, Exhibits)

Table 2
Mercury Operating Metrics:
Return on net assets
Return on equity
Asset turnover

2004
21.1%
18.5%
3.58x

2005
10.8%
9.6%
2.00x

2006
12.9%
12.1%
2.12x

Mercury Athletic Footwear: Valuing the Opportunity (HBS Case, Exhibits)

Exhibit 1 Active Gear, Inc. - Historical Income Statements


Operating Results:
Revenue
Less: Cost of Goods Sold
Gross Profit
Less: Selling Expenses
Less: General & Administrative Expenses
EBITDA
Less: Depreciation & Amortization
EBIT
Less: Net Interest Expense
Less: Other, net
EBT
Less: Taxes
Net Income

2004
450,174
223,617
226,557
127,705
31,437
67,415
7,049
60,367
5,092
1,211
54,064
19,192
34,872

2005
469,704
231,583
238,121
130,242
33,938
73,942
7,343
66,599
5,143
(752)
62,208
21,089
41,120

2006
470,286
234,494
235,792
130,471
36,535
68,786
8,366
60,420
5,098
24
55,298
19,349
35,949

1.7%
50.3%
15.0%
13.4%
12.0%
35.5%
7.7%
13.24
21.1%
18.5%
3.58x

4.3%
50.7%
15.7%
14.2%
13.2%
33.9%
8.8%
14.38
10.8%
9.6%
2.00x

0.1%
50.1%
14.6%
12.8%
11.8%
35.0%
7.6%
13.49
12.9%
12.1%
2.12x

Margins:
Revenue Growth
Gross Profit Margin
EBITDA Margin
EBIT Margin
EBT Margin
Tax Rate
Net Income Margin
EBITDA/Int Exp
RNOA
ROE
ATO

Mercury Athletic Footwear: Valuing the Opportunity (HBS Case, Exhibits)

Exhbit 2 Active Gear, Inc. - Historical Balance Sheets


2004

2005

2006

Assets:
Cash & Cash Equivalents
Accounts Receivable
Inventory
Prepaid Expenses
Deferred Taxes
Derivative Assets
Total Current Assets

92,735
46,507
38,493
8,298
8,681
0
194,714

63,949
50,649
50,140
10,051
8,080
1,813
184,682

54,509
61,322
56,030
12,223
6,519
53
190,655

Property, Plant & Equipment


Intangible Assets
Goodwill
Other Assets
Total Assets

23,694
6,414
4,249
2,982
232,053

24,712
12,273
11,851
3,079
236,596

28,392
14,360
11,915
3,249
248,571

Liabilities & Owners' Equity:


Accounts Payable
Accrued Expenses
Taxes Payable
Derivative Liabilities
Other
Total Current Liabilities

15,711
37,211
10,421
0
4,514
67,858

29,188
30,553
13,263
0
0
73,004

33,009
36,718
10,162
0
878
80,767

Long Term Debt


Deferred Compensation
Deferred Taxes

178,173
3,763
2,180

150,240
4,814
323

140,047
3,919
0

Total Owners' Equity


Total Liabilities & Owners' Equity

(19,921)
232,053

8,216
236,596

23,837
248,571

Mercury Athletic Footwear: Valuing the Opportunity (HBS Case, Exhibits)

Exhbit 3 Selected Data on Public Footwear Companies, March 15, 2007

Company
D&B Shoe Company
Marina Wilderness
General Shoe Corp.
Kinsley Coulter Products
Victory Athletic
Surfside Footwear
Alpine Company
Heartland Outdoor Footware
Templeton Athletic
Average

Company
D&B Shoe Company
Marina Wilderness
General Shoe Corp.
Kinsley Coulter Products
Victory Athletic
Surfside Footwear
Alpine Company
Heartland Outdoor Footware
Templeton Athletic
Average

Equity
Market Value Long term Debt
420,098
252,694
1,205,795
533,463
165,560
35,303,250
570,684
1,056,033
1,454,875
397,709

EBIT
Margin
4.4%
22.1%
8.8%
6.9%
14.1%
9.3%
10.4%
10.8%
19.9%
11.9%

0
237,955
109,866
8,423,384
257,617
381,283
0
195,389

Net
Debt (1)
125,442

Leverage
37.56%

D/E
29.9%

(91,559)
171,835
82,236
7,653,207
195,540
300,550
(97,018)
169,579

0.00%
30.85%
39.89%
19.26%
31.10%
26.53%
0.00%
32.94%

-7.6%
32.2%
49.7%
21.7%
34.3%
28.5%
-6.7%
42.6%
24.9%

1.94
1.92
1.12
0.97
2.13
1.27
1.01
0.98

Net Inc.
Margin
2.7%
13.4%
4.9%
5.0%
9.3%
5.9%
6.9%
7.3%
15.3%
7.9%

EBIT
Multiple
5.5x
18.0x
6.8x
7.3x
22.1x
7.4x
9.0x
12.0x
6.2x
10.5x

EBITDA
Margin
6.1%
23.1%
11.5%
8.9%
16.0%
10.8%
12.2%
12.6%
20.2%
13.5%

(1) Net debt is defined as debt less cash & cash equivalents
Note: Market multiples are based on three year averages. "LTM" denotes latest twelve months.

Mercury Athletic Footwear: Valuing the Opportunity (HBS Case, Exhibits)

Equity
Beta
2.68

Debt Beta
0.60
0.58
0.46
0.42
0.55
0.52
0.49

LTM
Revenue
2,545,058

LTM
Earnings
67,679

313,556
1,322,392
552,594
15,403,547
1,241,529
1,614,648
1,176,144
516,182

41,923
64,567
27,568
1,433,760
73,124
112,015
86,156
79,170

EBITDA
Multiple
3.9x
16.9x
5.1x
5.5x
19.2x
6.3x
7.6x
10.1x
6.0x
9.0x

P/E
Multiple
6.8x
31.6x
9.1x
6.6x
27.1x
8.6x
10.4x
18.6x
5.5x
13.8x

Revenue rD
CAGR 10 yr rf (3/2007)
2000-06
rE
6.6%
20.5%
17.8%
11.2%
4.6%
7.9%
10.1%
6.2%
8.5%
14.4%
9.7%

16.2%
16.1%
11.3%
10.5%
17.3%
12.2%
10.7%
10.5%
Weighted Avg
rUA of
Comparables

5.98% 10 yr Avg rf
4.73% rM
rUA MV for Weights
15.07%
0.22
16.18%
12.95%
9.20%
9.59%
13.78%
10.57%
10.69%
9.02%

12.846%

B/V
Multiple
0.9x
6.0x
1.6x
0.7x
6.0x
1.4x
2.0x
3.1x
1.2x
2.5x

Mercury Athletic Footwear: Valuing the Opportunity (HBS Case, Exhibits)

6.50%
12.4%

Assum

0.28 --Green highlights are used as com


--Excluded Victory athletic based
--Excluded Marina Wildeness and
0.30 --rM value is given in the case ins
--We chose rf as 10-year treasury
--We chose de-levering formula f
0.21 --rD value is 125bp above US tre

Rua for comparables is the weig


Value weights o

Assumptions

highlights are used as comparables based on similar leverage ratios.


ed Victory athletic based on size (equity).
ed Marina Wildeness and Heartland Outdoor because of zero debt.
ue is given in the case instructions
se rf as 10-year treasury notes as the assets are long lived
se de-levering formula for growing firm
e is 125bp above US treasury rate of 4.73% (10-year T Note)

comparables is the weighted average based on the Market


Value weights of eacj comparable

Mercury Athletic Footwear: Valuing the Opportunity (HBS Case, Exhibits)

Exhibit 4 Mercury Athletic - Historical Financial Statements


Operating Results:
Net Revenue
Less: Cost of Goods Sold
Gross Profit
Less: Selling, General & Administrative
EBITDA
Less: Depreciation & Amortization
EBIT
Less: Corporate Administrative Charge
EBT
Less: Taxes
Net Income

2004
340,578
198,115
142,463
102,410
40,053
7,699
32,353
275
32,079
12,190
19,889

2005
358,780
205,820
152,960
113,892
39,067
8,001
31,066
305
30,761
11,689
19,072

2006
431,121
239,383
191,738
139,933
51,804
9,506
42,299
366
41,933
15,934
25,998

Assets:
Cash & Cash Equivalents
Accounts Receivable
Inventory
Prepaid Expenses
Total Current Assets

2004
12,203
29,115
53,552
7,809
102,679

2005
20,187
38,654
70,818
15,810
145,470

2006
10,676
45,910
73,149
10,172
139,908

Property, Plant & Equipment


Trademarks & Other Intangibles
Goodwill
Other Assets
Total Assets

33,090
1,031
554
5,657
143,011

31,334
35,740
34,605
11,884
259,032

32,618
43,853
43,051
11,162
270,592

12,838
13,040
25,878

14,753
21,955
36,708

16,981
18,810
35,791

1,635
8,131

13,795
9,256

11,654
9,080

107,367
143,011

199,274
259,032

214,067
270,592

Liabilities & Owners' Equity:


Accounts Payable
Accrued Expenses
Total Current Liabilities
Deferred Taxes
Pension Obligation
Owners' Equity
Total Liabilities & Owners' Equity

NWC for 2006

104,117.24

Mercury Athletic Footwear: Valuing the Opportunity (HBS Case, Exhibits)

Exhibit 5

Mercury Athletic Footwear Segment Data 2004-06 (in $ thousands)

Fiscal Year 2006:


Revenue
Operating Income
Total Assets

Men's
Athletic
219,093
31,421
148,576

Men's
Casual
51,663
8,242
28,457

Women's
Athletic
123,563
12,703
27,978

Women's
Casual
36,802
(843)
34,701

Unallocated
Corporate
0
(9,224)
30,880

Consolidated
431,121
42,299
270,592

Fiscal Year 2005:


Revenue
Operating Income
Total Assets

151,900
18,398
173,482

55,402
9,077
30,842

108,097
11,631
24,267

43,381
(1,013)
12,197

0
(7,027)
18,244

358,780
31,066
259,032

Fiscal Year 2004:


Revenue
Operating Income
Total Assets

131,636
17,720
39,543

58,787
9,196
34,966

95,897
9,109
22,526

54,258
462
15,056

0
(4,134)
30,919

340,578
32,353
143,011

2006 EBIT Margins


2005 EBIT Margins
2004 EBIT Margins

Men's
Athletic
14.3%
12.1%
13.5%

Men's
Casual
16.0%
16.4%
15.6%

Women's
Athletic
10.3%
10.8%
9.5%

Women's
Casual
-2.3%
-2.3%
0.9%

Unallocated
Corporate
-2.1%
-2.0%
-1.2%

Consolidated
9.8%
8.7%
9.5%

Mercury Athletic Footwear: Valuing the Opportunity (HBS Case, Exhibits)

Exhibit 6 Mercury Athletic Footwear: Base Case Projected Segment Performance (in $ thousands)
Men's Athletic:
Revenue
Less: Operating Expenses*
Operating Income

2007
251,957
218,435
33,522

2008
282,192
244,647
37,545

2009
310,411
269,112
41,299

2010
335,244
290,641
44,603

2011
352,006
305,173
46,834

Men's Casual:
Revenue
Less: Operating Expenses*
Operating Income

52,179
43,834
8,345

53,223
44,711
8,512

54,287
45,605
8,682

55,916
46,973
8,943

57,594
48,382
9,211

Women's Athletic:
Revenue
Less: Operating Expenses*
Operating Income

138,390
124,302
14,088

153,613
137,976
15,638

167,438
150,393
17,045

179,159
160,921
18,238

188,117
168,967
19,150

Women's Casual:
Revenue
Less: Operating Expenses*
Operating Income

36,802
37,265
(463)

0
0
0

0
0
0

0
0
0

0
0
0

479,329
423,836
8,487
47,006

489,028
427,333
8,659
53,036

532,137
465,110
9,422
57,605

570,319
498,535
10,098
61,686

597,717
522,522
10,583
64,612

11,983
9,587

12,226
9,781

13,303
10,643

14,258
11,406

14,943
11,954

Consolidated Revenue
Less: Operating Expenses*
Less: Corporate Overhead
Consolidated Operating Income
Estimated Capital Expenditures
Estimated Depreciation

* Operating Expenses include an allocation of depreciation for each segment.

Mercury Athletic Footwear: Valuing the Opportunity (HBS Case, Exhibits)

Exhibit 7 Mercury Athletic Footwear: Projection of Selected Balance Seet Accounts; 2007-11 (in $ thousands)
Select Balance Sheet Accounts
Cash Used in Operations
Accounts Receivable
Inventory
Prepaid Expenses

2007
4,161
47,888
83,770
14,474

2008
4,195
48,857
85,465
14,767

2009
4,566
53,164
92,999
16,069

2010
4,894
56,978
99,672
17,222

2011
5,130
59,715
104,460
18,049

Property, Plant & Equipment


Trademarks & Other Intangibles
Goodwill
Other Assets

35,015
43,853
43,051
11,162

37,460
43,853
43,051
11,162

40,120
43,853
43,051
11,162

42,972
43,853
43,051
11,162

45,961
43,853
43,051
11,162

Liabilities
Accounts Payable
Accrued Expenses

18,830
22,778

18,985
22,966

20,664
24,996

22,149
26,792

23,214
28,081

Deferred Taxes
Pension Obligation

11,654
9,080

11,654
9,080

11,654
9,080

11,654
9,080

11,654
9,080

Mercury Athletic Footwear: Valuing the Opportunity (HBS Case, Exhibits)