* All assumptions are mentioned in comments

Revenue
Less: divisional operational expenses
Less: Corporate overhead
EBIT
Less: Taxes
EAT
Add: Depreciation
Net Working Capital
Less: Changes in WC
Less: Changes in Capex
Less: Changes in assets
Add: Changes in other liabilities
Free Cash Flow
Terminal Value
Total Cash flows
Rf
Rm
WACC
Growth Rate
Beta
Cost of Debt
Tax
Cost of Equity = Rf+Beta*(Rm-Rf)
Debt
Equity
Average Earnings (2004-06)
P/E
Discounted Cash Flows at t=0
Terminal Value discounted at t=0
Total Discounted Cash flow ie PV

4.93%
9.70%
10.514%
2.783%
1.53
6%
40%
12%
20%
80%
21653.05
13.81

Acquisition Price
NPV

299057.2
31674.93

IRR

2006
2007
###### ######
######
8,487
42,299 47,006
16,920 18,802
25,379 28,203
9,506
9,587
###### ######
4,567
11,983

2008
######
######
8,659
53,036
21,214
31,822
9,781
######
2,649
12,226

2009
######
######
9,422
57,605
23,042
34,563
10,643
######
9,805
13,303

2010
######
######
10,098
61,686
24,675
37,012
11,406
######
8,687
14,258

-299057 21,240

26,727

22,097

25,473

###### 21,240

26,727

22,097

25,473

19219

21884

17077

330732
8%
10%
10.51%
12%
14%

0
350302
277195
262928
228658
194145

330732.1

13.07%
WACC

Growth Rate Calculation:

PAT
Capital Employed
ROCE

16371

2011
38,767
331,381
12%

Reinvestments
PAT
Reinvestment Rate

9,222
38,767
24%

Growth Rate = ROCE* Reinvestment rate

2.783%

2011
597,717
522,522
10,583
64,612
25,845
38,767
11,954
136,059
6,233
14,943

29,545 FCFE(T)*(1+g)/(WACC-g)
392774.372 =29545*(1+0.02783)/(0.10514-0.02783) = 392774.4
422,319

17922.1972
238259.299

Growth Rates
2.783%
495109.578
355010.799
330736.259
275902.812
225145.358

3%
513175
363679
338134
280815
228222

4%
621758
411726
378596
306893
244125

5%
802729
478991
433734
340422
263561

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

Margins:
Revenue Growth
Gross Profit Margin
EBITDA Margin
EBIT Margin
EBT Margin
Tax Rate
Net Income Margin

1.7%
50.3%
15.0%
13.4%
12.0%
35.5%
7.7%

4.3%
50.7%
15.7%
14.2%
13.2%
33.9%
8.8%

0.1%
50.1%
14.6%
12.8%
11.8%
35.0%
7.6%

RNOA
ROE
ATO

21.1%
18.5%
3.58x

10.8%
9.6%
2.00x

12.9%
12.1%
2.12x

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
420,098
1,205,795
533,463
165,560
35,303,250
570,684
1,056,033
1,454,875
397,709

Net
Debt (1)
125,442
(91,559)
171,835
82,236
7,653,207
195,540
300,550
(97,018)
169,579

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

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

D/E
29.9%
-7.6%
32.2%
49.7%
21.7%
34.3%
28.5%
-6.7%
42.6%
24.9%

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

Equity
Beta
2.68
1.94
1.92
1.12
0.97
2.13
1.27
1.01
0.98

LTM
Revenue
2,545,058
313,556
1,322,392
552,594
15,403,547
1,241,529
1,614,648
1,176,144
516,182

LTM
Earnings
67,679
41,923
64,567
27,568
1,433,760
73,124
112,015
86,156
79,170

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

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

(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)

Revenue
CAGR Asset Beta
2000-06
6.6%
2.27
17.8%
2.03
11.2%
1.61
4.6%
0.86
7.9%
0.86
10.1%
1.77
6.2%
1.08
8.5%
1.05
14.4%
0.78
9.7%
1.37

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)

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

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

104,117

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

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%

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

Consolidated
431,121
42,299
270,592

Consolidated
9.8%
8.7%
9.5%

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

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

Women's Casual:
Revenue
Less: Operating Expenses*
Operating Income
Consolidated Revenue
Less: Operating Expenses*
Less: Corporate Overhead
Consolidated Operating Income
Estimated Capital Expenditures
Estimated Depreciation

36,802
37,265
(463)

* 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

2,989
6,233
9,222

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

533,361

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