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Mercuty Footwear

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Submitted By demolaster
Words 759
Pages 4
Q2:
Financial projections based on forecasts of revenue and operating income for each of Mercury’s four main segments.
Liedtke’s base case assumed that: * He assumed that Mercury’s historical corporate overhead-to-revenue ratio would conform to historical averages. * Women’s casual footwear will wound down in the first year of an acquisition. As he doubted that WCF would be willing to sell Mercury without it. * He didn’t prepare projections for debt or equity accounts. * To estimate a discount rate, Liedtke analyzed to assume the same degree of leverage for Mercury with AGI, which he estimated to be 20%. (Debt divided by the market value of AGI’s invested capital). * He expected this degree of leverage to pint a cost of debt for 6.0%, 40% tax rate, equal to AGI’s marginal tax rate.

Mercury’s EBIT margin for 2006 was 9.8%. Lietdke’s 2007 projected EBIT reflects a conservative increase in EBIT of 9% compared to the average industry growth rate of 10%.
According to the forecast for 2007 to 2011, the company is forecasted to show gradual and stable growth of consolidated income from $479.3 million to $597.7 million.
This growth rate was estimated by assuming that men’s athletic sales will be declining from 15% in 2007 to 5% in 2011.
Similar trends are assumed for women’s athletic which the growth rate is forecasted to decrease from 12% in 2007 to 5% in 2011.
Men’s casual footwear, on the other hand, is expected to slowly increase its revenue growth rates when added to AGI assets.
Women’s casual footwear was not projected to grow at all. Operating income was forecasted using an assumption that the management of the company will be able to sustain EBIT margins at 13% for men’s athletic, 16% for men’s casual, 10% for women athletic.

2007 | 2008 | 2009 | 2010 | 2011 | | | 15% | 12% | 10% | 8% | 5% | 8.75% | Revenue Growth | | 0.87 | 0.87 | 0.87 | 0.87 | | Ratio of Expense | | 13.30% | 13.30% | 13.30% | 13.30% | | Operation margin to renevue | | 12% | 10% | 8% | 5% | | Operation Margin growth | | | | | | | | 1% | 2% | 2% | 3% | 3% | 2.5% | Revenue Growth | | 0.84 | 0.84 | 0.84 | 0.84 | | Ratio of Expense | | 15.99% | 15.99% | 15.99% | 15.99% | | Operation margin to renevue | | 2% | 2% | 3% | 3% | | Operation Margin growth | | | | | | | | 12% | 11% | 9% | 7% | 5% | 8% | Revenue Growth | | 0.90 | 0.90 | 0.90 | 0.90 | | Ratio of Expense | | 10.18% | 10.18% | 10.18% | 10.18% | | Operation margin to renevue | | 11% | 9% | 7% | 5% | | Operation Margin growth | | | | | | | | | 0.00% | | | | 0 | Revenue Growth | | 1.01 | | | | | Ratio of Expense | | | | | | | Operation margin to renevue | | | | | | | Operation Margin growth | | 0.8842 | 0.8738 | 0.8740 | 0.8741 | | Operation expense to Revenue | | 0.018 | 0.018 | 0.018 | 0.018 | | Over-Head to revenue | | 0.902 | 0.892 | 0.892 | 0.892 | | Total amount |

According to the Exhibit 5&6:

Product segment Of Company | Growth Rate(2004-2006)Exhibit 5 | Projected Growth Rate(2007-2011)Exhibit 6 | Men’s Athletic | 29.82 % | 8.75 % | Men’s Casual | -6.25 % | 2.5 % | Women’s Athletic | 13.51 % | 8 % | Women’s Casual | -17.61 % | 0 |

In that case, he thought the combined businesses could achieve an EBIT margin of 9% and revenue growth of 3%. He projected revenue growth is 3% and if we compare this rate with past three year it seems it’s not accurate, and the average of the growth rate is 12.75%, which is much higher than he’s conservative forecast.

According to The Exhibit 4: | (2005-2004) | (2006-2005) | | | $358,780-$340,578$340,578 | $431,121-$358,780$358,780 | | | 5.35% | 20.15% | | | Historical | projected | Total Revenue Growth Rate | 12.75 % | 3 % | | (2004-2005-2006) | | Exhibit 5 | (9.5%+8.7%+9.5%)3 | | EBIT Margin | 9.33 % | 9 % |

He believed that AGI’s inventory management system would reduce Mercury’s DSI to the same level as AGI’s or even can be reduce to average of the industry that make reduce total expenses.
In addition, he thought it was possible that Mercury’s women’s casual footwear line could be better to fold this segment into AGI’s, rather than discontinued.
According to the Exhibit 6 performance projection for 2007-2011, because of writing off the women’s casual footwear line, revenue will drop that lowers the enterprise value. This might be done so it help him to achieve a lower price on the initial acquisition purchase and then once he buys the company, he will then fold the women’s line into AGI’s, which will then have a higher rate of return than projected to the sellers.

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