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Valuation and Financing of Lady M Confections Case Solution & Answer

Exhibit 2: Fundamental Analysis and Comparable Analysis

FIVE YEAR PROJECTIONS FOR LADY M CONFECTIONS
  2014 2015 2016 2017 2018 2019
Sales 11.000 13.2 18.48 23.1 28.875 36.0938
Cost of Sales 2.397 2.397 2.397 2.397 2.397 2.397
Gross Margin 8.603 10.803 16.083 20.703 26.478 33.696
Compensation            
Salaries and wages 3.9527 4.74328 6.6406 8.30075 10.3759 12.9699
Employee benefits 0.1833 0.21995 0.30794 0.38492 0.48115 0.60144
             
Total Compensation 4.1360 4.9632 6.9485 8.6857 10.8571 13.5714
PRIMCE COST 4.4665 5.8393 9.1340 12.0169 15.6204 20.1249
Other Controllable Expenses            
Sales, General, & Admin. 6.3765 6.31273 6.2496 6.1871 6.12523 6.06398
Direct operating expenses 0.7340 0.88075 1.23305 1.54131 1.92664 2.4083
Marketing 0.0362 0.04349 0.06088 0.0761 0.09513 0.11891
Utilities 0.1837 0.22044 0.30861 0.38577 0.48221 0.60276
Rent 0.3106 0.31992 0.32952 0.3394 0.34958
General and Administrative 0.5974 0.71684 1.00358 1.25448 1.5681 1.96012
Repairs and Maintenance 0.1534 0.18405 0.25767 0.32208 0.40261 0.50326
Research and Development 0.0000 0.0132 0.0185 0.0231 0.0289 0.0361
             
Total other controllable expenses 1.7046 2.3694 3.2022 3.9324 4.8429 5.9790
CONTROLLABLE PROFIT 2.7619 3.4699 5.9318 8.0845 10.7775 14.1459
Occupancy and Depreciation Expenses 1.1063 1.32751 1.85851 2.32314 2.90392 3.6299
Occupancy 0.2188 0.26256 0.36759 0.45948 0.57435 0.71794
Depreciation & Amortization 0.1565 0.16428 0.17249 0.18112 0.19017 0.19968
Depreciation 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
Amortization 0.0734 0 0 0 0 0
Insurance 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
Other (Income) Expense 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
Other (Income) 0.0546 0.06552 0.09173 0.11467 0.14333 0.17917
Interest Expense 0.0546 0.06552 0.09173 0.11467 0.14333 0.17917
Other expense 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
             
NET INCOME BEFORE INCOME TAXES 1.0978 1.5845 3.3497 4.8914 6.8224 9.2400
Corporate Taxes 0.3842 0.5546 1.1724 1.7120 2.3878 3.2340
             
NET INCOME 0.7135 1.0299 2.1773 3.1794 4.4345 6.0060
Add Back: Depreciation   0.16428 0.17249 0.18112 0.19017 0.19968
Less: CAPEX   1 0.05544 0.0693 0.08663 0.10828
Less: Net Change in WC 0.068 0.0816 0.11424 0.1428 0.1785 0.22313
FCF   0.1126 2.1801 3.1484 4.3596 5.8743
Terminal Value           76.3659
Net FCF   0.1126 2.1801 3.1484 4.3596 82.2402

 

COMPARABLE VALUATION ANALYSIS
Competitors Sales Enterprise Value Net Income
Magnolia Bakery 40 75 14.5
Two Little Red Hens 133.4 72.036 -4.34
Flower Food Inc 3750 4125 175.74
       
Note: Figures Extracted from Morningstar.co, as case does not have this information.      
       
Multiples EV/Sales EV/Net Income  
Magnolia Bakery 1.875 5.17  
Two Little Red Hens 0.54 -16.60  
Flower Food Inc 1.1 23.47  
Average Multiples 1.17 4.02  
Lady M Confections Sales and Net Income (2014) 11 0.71  
Valuation of Lady M Confections ($Millions) 12.89 2.87  

 

Exhibit 3: Evaluation of Chinese Investor Offer

CHINESE INVESTOR OFFER EVALUATION
  2015 2016 2017 2018 2019
Net FCF 0.113 2.180 3.148 4.360 82.240
Discount Factor 12% 0.893 0.797 0.712 0.636 0.567
PV of FCF 0.101 1.738 2.241 2.771 46.665
Valuation of Lady M Confections ($M) 53.515        
           
           
Ownership Chinese Investor Lady M      
100%/0% 53.515 0      
25%/75% 13.379 40.137      
50%/50% 26.758 26.758      
           
Current Chinese Investor Offer 10 millions      
Valuation of Lady M Confections ($M) 53.52        
Ownership to give up 18.69%        

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