The Valuation and Financing of Lady M Confections Case Solution
Lady M Confection is one of the renowned cake whole sale business companies that was founded in May 2001. The company takes pride in providing the finest and freshest cakes and confectionary delights to its customers. Additionally, the company has been providing highest quality items in appearance and quality. The company sells its products to upscale luxurious hotels and restaurants in the New York City. Under the case, since the investors of Lady M Company have contemplated to expand the brand to the Middle East and Asia, they have an opportunity available to open an additional cake boutique in the New World Trade Center, which is the prime location being available at an annual rent of $310,600. On the other hand, $10 million dollars line of credit in exchange for the equity stake have been offered by the Chinese investors. The company has to decide to select either Chinese investorâ€™s offer or the New World Trade Center location.
The case explores the process of decision making that private or small business must under take while considering an expansion as well as when selling equity to outside Chinese investor. In such process, there is a need to have complete valuation exercise along with the financial projections in order to evaluate the worth of the company after following any of the two options.
The valuation of the company determines that how much value the project would add to the company in forthcoming years. After valuing the projects, it is to analyze that if the company decides to open an additional boutique at the new location, instead of accepting the offer by made by the Chinese investor, then the Net Present Value (NPV) is generated from the project over the period of the six year, by assuming that the market growth would remain constant at 20% over the period of six years. Thus, the Net Present Value generated would be $1738518.77, which depicts that the company would be able to gain the considerable amount of funds on the initial investment of $1000000 or 1 million, making the company able to successfully establish the new boutique at the prime location.
On the other hand, if the company opts for accepting the equity stake from the Chinese investor i.e. $10 million, then the total enterprise value would be $14186735.93. While considering all the posted assumptions by Tom and Romaniszyn, in order to project the net cash flows generated from the fiscal year 2014 to 2019. It is imperative to note that the investment offer by Chinese investors would most likely be accounted for 70% of companyâ€™s total equity.
The company has two alternative which includes either to permit the Chinese investor to hold the equity stake in the company or to expand the business by opening an additional boutique at the prime location i.e. the New World Trade Center. The alternatives have several pros and cons which are listed below:
Alternative 01:$10 million equity stake investment from a Chinese investor
Seeking outside investment comes with benefits and cost, which are as follows:
- The investment would allow the company to access the capital, the money can be used for building the market image, improving the productivity and boosting the performance.
- It would allow the company have an access to the financial resources, thus helping it to build and grow the business, increasing profitability and revenues.
- The Chinese investor would contribute to human capital by being available to provide suggestions or advices that would allow the company to benefit from the added value of these additional advices or opinions.
- Unlike the loan with variableandfixed interest rate on which the payment makes payment per month, investment in the organization is not debt, it is equity. The company would not have to pay back the money being injected by investors or pay a set rate of interest.
- In addition to this, the investors would have equity in the business, owing an investor a percentage or distribution of companyâ€™s revenue would most likely divert much needed funds from reinvestment in the business, in case the company goes public.
- In addition to this, the investors would take risks for supporting the company, thus have a vested interest in the companyâ€™s success, they often receive the right to vote on major decisions. This in turn shifts the balance of power away from the company, hence leading to difficulties or challenges down the road.(Gold, 2007)……………….
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