The Valuation and Financing of Lady M Confections Case Study Solution
The iconic US based Lady M Confections,specializes in providing high-quality, finest and freshest confectionary delights, and is famous for its cakes particularly. The cakes offered by Lady M Confections are hand-made, following the recipes that have been refined over the period of time, to provide highest quality in appearance and taste. The company has become a renowned business, due to its relentless efforts in gaining an exceptional market position.
The bakery has gained an exceptional popularity, so it has contemplated to expand the business operations to the Middle East and Asia.The company could capture and exploit the opportunity to open an additional cake boutique in the New York World Trade Center â€“ the prime location available, at an annual rent of $310600. Conversely, a $10 million offer was made by the Chinese investoras well as a line of credit, in exchange for the stake in the companyâ€™s equity, with an inclusion of exclusive franchising rights in China. The case explores the process of decision making, which private or small businesses should undertake, when selling equity stake to the investor or considering the expansion of the business operations.
Valuation of the company
Valuation using perpetuity method
The EV and the value per share could be calculated on the basis of terminal value based on the perpetual growth rate, i.e. 4 percent. The companyâ€™s income statement is projected with an intent of determining the earnings before interest and tax, for the years 2014 â€“ 2019. The COGS, SG&A and R&D expenses as a percentage in sales,are considered in the valuation because these operating expenses depend on the companyâ€™s sales level. The assumptions proposed by Tom and Romaniszyn are embedded in the projections. Additionally, the operating expenses tend to be adjusted with rent, labor and utilitiesâ€™ costs, which are expected to incur in case of opening a new boutique at the new location. The enterprise value or net present value is calculated using the perpetuity growth rate of 4 percent, for the free cash flowâ€™s terminal value. Under the perpetuity method; the terminal value using the weighted average cost of capital of 12 percent, is amounted as $35968269; whereas, the enterprise value or net present valueis calculated to be $23149815, which depicts that the company could gain a considerable amount of funds so that it would successfully establish the new boutique at the prime location.(Mass, 2005).
DCF Valuation (Terminal Value Based on EBITDA Multiple)
On the basis of the given forecasts, a DCF Valuation model has been created. A discount rate is assumed to be 12%. On the basis of thegiven EBITDA of 12x; the Terminal Value (TV) at the end of 2019, equals to 54961302 million dollars. On thebasis of the aforementioned data and calculations; the companyâ€™s enterprise value or net present value equals 35076272 milliondollars.The comparison of the enterprise value calculated under the perpetuity method or the EBITDA method,shows that with perpetuity method; the company is undervalued because of the reason that the method takes the interest, taxes, depreciation and amortization expenses under consideration, which tends to make an unprofitable company look financially stable and profitable.(Gil, 2016)…………………………………….
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