Mercury Athletic Footwear Essay Example for Free

Mercury Athletic Footwear Essay John Liedtke head of Active Gear, Inc. (AGI) is contemplating whether to invest in Mercury Athletic a subsidiary of West Coast Fashions (WCF). Mercury was purchased by WCF in hopes to increase business revenue however this was not the case. Business did not do as expected, WCF was then eager to abandon its apparel. John Liedtke saw this as an opportunity to take over Mercury and as result increase its business revenue. In order to determine whether this is an essential business opportunity John needs to complete preliminary financial valuations to make a solid decision. Active Gear’s current income statements and balance sheets have made it evident that the firm has a lot of potential for growth when acquiring an additional company. After maintaining simple production and supply chains AGI avoided the worst of industry write-downs and missed profit opportunities (Luehrman, Helprin (2009). In comparison to other larger industry’s AGI has a strong operating margin. Even though AGI is a profitable firm it has a downfall that it is much smaller than many of its competitors and is slowly becoming a disadvantage. In order to foresee future growth AGI should take the necessary measures to incorporate Mercury Athletic Footwear. Similar to AGI, Mercury has potential room for growth despite its former acquisition with West Coast Fashions. In order to determine Mercury’s future financial growth John should use financial forecasting. This is essential for budgeting as well as planning purposes. The most obvious involves using cash flow forecasts (Formula shown on Exhibit 1). Cash flow forecasts are used to predict account balances several years into the future and indicates what is expected to exist during a forecast period (Gabehart Valuation Services. (2003). In conducting a 5 year projection from 2006 to 2011 in both the income statement and balance sheets John can identify Mercury’s net worth and highlight what its financial revenue maybe (Formula shown on Exhibit 1). These forecasts results are based on historic facts and can be adjusted. In doing this John can clearly see whether processes are in control or out of control for example how inventory changes affect finance costs and whether the investment is worth making. This also makes it clear what financing options are more suitable in the long term and which ones would cause problems, as a result avoid any surprises (Olley (2006). The discount rate of acquiring Mercury is also essential to know. Since discount cash flow is a valuation method used to estimate investment opportunities. Its purpose is to estimate money received from an investment and adjust for time value money (Harman (2011). In this case a 12% forecast was estimated and reflected a positive factor toward PV and NPV. There are however, some circumstances where discount cash flow can be a challenge for example, the most prevailing is when cash flow projections increase for each year in the forecast. It is then assumed that a company will mature in such a way that their maintainable growth rates will lean toward long-term rate of economic growth in the long run (Harman (2011). This intern becomes a challenge for the company against unexpected risks. In consideration to Mercury’s financial history and projections it would be in the best interest for AGI to move forward and invest in Mercury. This would increase revenue for AGI and bring in a new customer market. Prior to doing so John will need to perform a financial forecast as previously discussed. The review of general factors and considerations related to the preparation of forecasts needs to be in order as well. To begin John will need to compare each given year’s net worth on the balance sheet to the next. Assuming the cash flow is increasing and positive figures are shown it can be determine that revenue is coming in. However, most importantly if the Net Present Value (NPV) reflects a negative number or is smaller than zero then the investment should be rejected. In this case NPV is positive therefore John should accept the investment. Using this determination John will be able to make a confidant decision. The use of predicting income figures is important as it recognizes a company’s future benefits and is highly stressed in a company especially when determining an investment opportunity.