Q1

AGI
470,286
Casual footwear

Revenue
Advantage department

Mercury
431,121
Athletic footwear

Mercury advantage department

Revenue of each
department
Revenue of each
department/total
avenue

Mens athletic

Mens casual

Womens athletic

Womens casual

219,093

51,663

123,563

36,802

0.51

0.12

0.29

0.09

Q2
a.WACC
Assumption:

d 0

D
20%
DE
rd 6%
Calculation:
1.cause

d 0 ,

use

CAPM

rm rf 9.7% 6% 1.7%

2.Under

u
Put all
average

constant

rd r f d rm rf

model,

debt-equity

ratio

assumption,

D
E
d
e
DE
DE ,

e from

exhibit 3 into the formula, we can get

u of the industry is 1.28.

3.Use
4.use

D
D

e 1 u d
E
E

CAPM

u for

we

then

rf 6%

know

5.
6.Under

can calculate e of Mercury, which is 1.6

model,
cost
of
equity

e from

pre-specified

debt

amount

assumption,

exhibit 3 into the formula, we can get

average u of the industry is 1.37.

7.Use
8.use

D
D

e 1 1 - c u 1 - c d
E
E

CAPM

model,

u for

9.
b.

we

know

that

each company, and the

can calculate e of Mercury, which is 2.61

cost
of
equity
is

re rf e rm rf 6% 2.611.7% 15.67%

WACC

is

D
D

rd 1 c 1
re 10.25%
DE
DE

1 - c D
E
u

d
1 - c D E
1 - c D E e ,

Put all

that

each company, and the

re rf e rm rf 6% 1.6 1.7% 11.91%

WACC

D
D

rd 1 c 1
re 13.26%
DE
DE

FCFF=EBIT(1-tax rate)-(cpital expenditure-depreciation)-change in non-cash working capital

2007
2008
2009
2010
2011
Consolidate
d Revenue
479329
489028
532137
570319
597717
Less:
Operating
Expenses*
423836
427333
465110
498535
522522
Less:
Corporate
Overhead
8487
8659
9422
10098
10583
Consolidate
d
Operating
Income
47006
53036
57605
61686
64612
tax
0.4
net income
28203
31822
34563
37012
38767
less:Estima
ted Capital
Expenditur
es
11,983
12,226
13,303
14,258
14,943
plus:Estima
ted
Depreciatio
n
9,587
9,781
10,643
11,406
11,954
less:DNWC
4567
2649
9805
8687
6233
FCFF
21240
26727
22097
25473
29545
DNWC calculation process is added to the appendix.
C.
Long-term growth rate
We
know
that

GR reinvest rate ROI

netcapex nwc EBIT 1 c 0.5462 0.1170

EBIT 1 c
BVofasset

Use the information of 2011,then GR=6.39%, assume that this is the long-term growth rate

FCFF2011

FCFF20111 GR 29545(1 6.39%)

814324
WACC GR
10.25% - 6.39%
,Under

Terminal
value=
constant debt-equity ratio assumption.
TV=457539,Under pre-specified debt amount assumption.
d.
Value the company:

V2006

2011

CFt

1 r

t 2007

year
CF

TV
(1 r ) 5

2007
21240

2008
26727

2009
22097

2010
25473

TV

2011
29545
457539
814324

or

V2006=574908,Under constant debt-equity ratio assumption.

Or =315774,Under pre-specified debt amount assumption.
Q3

EG. Double the revenue, CF increase, V increase

appendix:
Cash Used in

2006
10,676

2007
4,161

2008
4,195

2009
4,566

2010
4,894

2011
5,130

Operations
Accounts
Receivable
Inventory
Prepaid
Expenses
Total
Current
Assets
Accounts
Payable
Accrued
Expenses
Total
Current
Liabilities
NWC
DNWC

45,910
73,149

47,888
83,770

48,857
85,465

53,164
92,999

56,978
99,672

59,715
104,460

10,172

14,474

14,767

16,069

17,222

18,049

139,908

150,293

153,284

166,798

178,766

187,354

16,981

18,830

18,985

20,664

22,149

23,214

18,810

22,778

22,966

24,996

26,792

28,081

35,791
104117

41,609
108684
4567

41,951
111333
2649

45,659
121138
9805

48,941
129826
8687

51,295
136059
6233