The Valuation and Financing of Lady M Confections Case Solution & Answer

 The Valuation and Financing of Lady M Confections Case Solution


Lady M Confections is one of the renowned cake wholesale business companies, which was founded in May 2001. The company has prided itself on providing the finest and freshest cake and confectionery delights to its customers. 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 items in appearance and taste.The company sells its products to upscale luxury hotels and restaurants in the New York City. Based on the continued success and exceptional popularity; Lady M Confections is concerned about expanding its business operations  in Asia & Middle East. It is presented with an opportunity to open an additional cake boutique in the New York World Trade Center – the prime location available, at an annual rent of $310600. In contradiction, the Chinese investor has made an offer of $10 million and a line of credit, in exchange for the stake in the company’s equity, with an inclusion of exclusive franchising rights in China. The case sets out to assess the feasibility of each alternative and to come up with the most viable option.

Valuation of Lady M Confections

Perpetuity method

The value per share and enterprise value are calculated on the basis of terminal value based on the perpetual growth rate of 4 percent. The income statement of the company is foretasted in order to evaluate the EBITDA from 2014 to 2019. The set of assumptions proposed by Roman is zyn & Tom are also incorporated in the projections. Additionally, the R&D, SG&A and cost of goods sold are assumed to be the percentage of sales, which are also incorporated in the business’s valuation, because these operating expenses depend on the company’s sales level Furthermore, the operating expenses need to be adjusted with the labor & utilities cost and rent which are incurred if the company decides to open a new boutique at the prime location. Using the 4% perpetuity growth rate; the terminal value using the 12% weighted average cost of capital is amounted as $35968269.Whereas the net present value or enterprise value is calculated to be $23149815, which stipulates that Lady M Confections could gain a considerable amount of funds so that it could successfully establish its new boutique at the prime location. (Mass, 2005).

Discounted cash flow method

Based on the provided forecast; the discounted cash flow model is created. The weighted average cost of capital is assumed to be 12%, and based on the given EBITDA of 12x, at the end of the year 2019; the terminal value is calculated to be $54961302 million. On the basis of the aforementioned data and calculations; the company’s enterprise value or net present value equals to 35076272 million dollars.The comparison of the enterprise value calculated under the perpetuity method or the EBITDA method, shows that with the perpetuity method; the company is undervalued because of the reason that the method takes various expenses under consideration, such as: depreciation, taxes, interest and amortization, hence making an unprofitable company look financially profitable&stable. (Gil, 2016).

Valuation of offer made by Chinese Investor

Enterprise Value-using perpetuity method

Using the perpetuity method; the company’s valuation is performed by assuming that the owners takes up the $10 million offer from the Chinese investor. Lady M Confections would be obliged to abandon its 45.18 percent equity stakes in case it accepts the offer made by the Chinese investor. The $10 million equity stake offer is divided by the equity value of $22132200 in order to calculate the equity stake.

Enterprise Value under the EBITDA method

The valuation of the offer made by the Chinese investor under the EBITDA method shows that given its initial investment of 10 million dollars; the Chinese investor would receive 29.36% equity stake of the company’s capital gain.  The equity stake of the investor is calculated by dividing the 10 million dollars equity stake offer by the company’s equity value, amounted as $34058657.

Analysis of Break- Even Point for Lady M for 2014

The breakeven for the year 2014 is performed using the information provided in the case and it is analyzed that the price of cake is $80; whereas, the cost of goods sold is 50% of the gross sales, which shows that the gross sales of the new location for 2014 would be $1887988. Hence, Lady M Confections would have to sell 65 cakes per day and 23600 cakes per year in order to reach the breakeven point and to make the decision of opening a new store at the new location, feasible & meaningful………………

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