The valuation and Financing of Lady M confections Case Study Help

The valuation and Financing of Lady M confections Case Solution

To: Rosmaniszyn & Tom

From: Financial Advisor

Subject: Financial Evaluation of investment opportunities

Under the case, it can be evaluated that, there are two different opportunities present to Lady M owner and senior executives. Which included the opportunity to open an additional Boutique in the New World Trade Center, which was a prime location and could incur significant expenses establish and operate the new boutique in this location. On the other hand, a $10 million equity stake investment was offered from a Chinese investor.However, it can be analyzed that, if the Lady M decides to open the new store, instead of accepting the Chinese investor offer.Then the net present values generated from the project over the five year period, under the assumption that, market growth remain constant at 20% over the five year period. Hence, the NPV generated would be a positive $1,260,699. Which means that, Lady M would be able to gain considerable amount of money on their initial investment of $1 million, to establish a new boutique in World Trade Center. On the other hand, if Lady M decides to accept the $10 million equity stake offer from Chinese investor, then the total enterprise value would amount to $76,925,028. While considering all the assumption made by Romaniszyn and Tom, to forecast the net cash flows generated from 2014 to 2019. Therefore, the $10 million equity stake offer from the Chinese investor would amount for 13% share in the total equity of Lady M.

Therefore, it can be recommended to Rosmaniszyn and Tom that, they should considering opening a new cake boutique in the prime new World Trade Center Location, instead of accepting the $10 million equity stake offer from Chinese investors. As accepting the equity stake offer would compel Lady M, to handover almost 13% share in its equity to the Chinese investor. Which would enable the investor to significantly benefit from the offer, while leaving little future benefit for Lady M and expose them to share equity with its investor for a long period of time. Whereas, by considering the new boutique opening opportunity, Lady M would be able to recover the initial cost of establishment in under five years, while gaining significant returns amounting to $1,260,699 within five years of operations. Furthermore, it was assumed that, even if Lady M decided to finance the $1 million establishment cost from bank, incurring 9% interest expense. It would still be able to make $474,858 over the five year period of operation, under the assumption that the sales growth rate remains constant at 20%. Therefore, it can be evaluated that, as the new boutique opening is beneficial for Lady M hence, there is no need to accept the $10 equity stake investment offer from Chinese investment and pay continues equity share payment to him, as the company expands in the future, attributed to its efficient historic performance in the highly diverse and competitive market.

 

Project Valuation under (Best Case) scenario Market Growth 20%
Years 0 1 2 3 4 5
Initial Investment  $ (1,000,000)          
Annual Revenues    $              1,152,001  $  1,382,401  $  1,658,881  $  1,990,658  $  2,388,789
Annual Rent    $               (310,600)  $   (319,918)  $   (329,516)  $   (339,401)  $   (349,583)
Annual Utility cost    $                 (38,644)  $     (39,803)  $     (40,997)  $     (42,227)  $     (43,494)
Annual Labor cost    $               (594,750)  $   (624,488)  $   (655,712)  $   (688,497)  $   (722,922)
Gross Profit    $                 208,007  $     398,192  $     632,657  $     920,532  $  1,272,790
Discount factor @10%              1.0000                        0.8929            0.7972            0.7118            0.6355            0.5674
Present value  $ (1,000,000)  $                 185,721  $     317,437  $     450,312  $     585,015  $     722,215
NPV  $   1,260,699
IRR 27%
Breakeven point              23,600

 

Project Valuation under (Worst Case) scenario Market Growth 5%
Years 0 1 2 3 4 5
Initial Investment  $ (1,000,000)          
Annual Revenues    $              1,152,001  $  1,209,601  $  1,270,081  $  1,333,585  $  1,400,264
Annual Rent    $               (310,600)  $   (319,918)  $   (329,516)  $   (339,401)  $   (349,583)
Annual Utility cost    $                 (38,644)  $     (39,803)  $     (40,997)  $     (42,227)  $     (43,494)
Annual Labor cost    $               (594,750)  $   (624,488)  $   (655,712)  $   (688,497)  $   (722,922)
Gross Profit    $                 208,007  $     225,392  $     243,856  $     263,459  $     284,265
Discount factor @10%              1.0000                        0.8929            0.7972            0.7118            0.6355            0.5674
Present value  $ (1,000,000)  $                 185,721  $     179,681  $     173,572  $     167,433  $     161,300
NPV  $     (132,293)
IRR -5%
Breakeven point              23,600

 

Investment Acquired on loan Project Valuation under (Best Case) scenario Market Growth 20%
Years 0 1 2 3 4 5
Initial Investment  $ (1,000,000)          
Annual Revenues    $              1,152,001  $  1,382,401  $                           1,658,881  $  1,990,658  $  2,388,789
Annual Rent    $               (310,600)  $   (319,918)  $                            (329,516)  $   (339,401)  $   (349,583)
Annual Utility cost    $                 (38,644)  $     (39,803)  $                               (40,997)  $     (42,227)  $     (43,494)
Annual Labor cost    $               (594,750)  $   (624,488)  $                            (655,712)  $   (688,497)  $   (722,922)
Interest Payment    $               (218,000)  $   (218,000)  $                            (218,000)  $   (218,000)  $   (218,000)
Gross Profit    $                    (9,993)  $     180,192  $                               414,657  $     702,532  $  1,054,790
Discount factor @10%              1.0000                        0.8929            0.7972                                     0.7118            0.6355            0.5674
Present value  $ (1,000,000)  $                    (8,922)  $     143,648  $                               295,144  $     446,472  $     598,516
NPV  $       474,858
IRR 10%
Breakeven point              23,600

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Posted on June 13, 2017 in Case Solutions

The valuation and Financing of Lady M confections Case Solution

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