Fin 335 - Entrepreneurial Finance

CASE STUDY: The Valuation and Financing of Lady M Confections

(12% of final grade)

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After reading the case, “The Valuation and Financing of Lady M Confection”, found in the HBP Coursepack, analyze a

Questions 1-5 should be written up and submitted formally through the TurnItIn link in “The Valuation and Financin
You must use this Excel template to solve and to submit or your submission will not be graded.

1. For the WTC location, Romaniszyn and Tom need to decide what the break-even number of cakes is. Using the gi
Write the equation that produces this result.

Break-even number of cakes:

Equation: B/E Units = (Fixed Cost/Revenue per Unit - VC per unit)

Break Even # of cakes: 23,600

Fixed Cost $ 943,994.00

Avg Rev Per Uni $ 80.00
Avg Cost Per Un $ 40.00
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BP Coursepack, analyze and answer the following questions (one question per tab).

e Valuation and Financing of Lady M Confection” Content folder in Unit 2 on BBLearn.

r of cakes is. Using the given estimates for price and rent, utilities and labor costs (found in the case study), find the operating

nit - VC per unit)

$ 310,600.00 Rent
$ 38,644.00 Ultilties
$ 594,750.00 Labor
$ 943,994.00 SG&A
dy), find the operating Break-Even number of cakes.
2. Assuming sales in the 1st year are breakeven, what is the growth rate of sales required to pay the start up costs f
Use the template below to complete.

Growth Rate Calculation

2015 2016
Year One Year Two
Rent $ 310,600.00 $ 319,918.00
Utilities $ 38,644.00 $ 39,803.32
Labor $ 594,750.00 $ 624,487.50
COGS $ 943,994.00 $ 1,132,792.80
Total Cost $ 1,887,988.00 $ 2,117,001.62
Gross Sales $1,887,988.00 $2,265,585.60
Average Retail per Cake $ 80.00 $ 80.00
Cakes Sold per year 23,600 28,320
Cakes Sold per day 64.7 77.6

Net Income* $0.00 $148,583.98

*Not including Taxes
Start-up Cost Left $ 850,000.00 $ 701,416.02

Assumed Start-Up Cost $ 850,000.00 (600k-1m range)

d to pay the start up costs for the WTC location within 5 years?

wth Rate Calculation

Growth Rate 20.0%

2017 2018 2019

Year Three Year Four Year Five
$ 329,515.54 $ 339,401.01 $ 349,583.04
$ 40,997.42 $ 42,227.34 $ 43,494.16
$ 655,711.88 $ 688,497.47 $ 722,922.34
$ 1,359,351.36 $ 1,631,221.63 $ 1,957,465.96
$ 2,385,576.19 $ 2,701,347.45 $ 3,073,465.50
$2,718,702.72 $3,262,443.26 $3,914,931.92
$ 80.00 $ 80.00 $ 80.00
33,984 40,781 48,937
93.1 111.7 134.1

$333,126.53 $561,095.81 $841,466.42

$ 368,289.49 $ (192,806.32) $ (1,034,272.74)

3. Using the data provided in the financial statements for Lady M, calculate the historical (2014) and projected FCFs
Partial data is provided below. Remaining data will come from the case study.
Use the template below to complete.

Ca

000s Historical
2012 2013
Sales $4,132.5 $7,491.2
COGS (excluding depr.) $1,303.4 $1,632.7
Gross Profit $2,829.1 $5,858.5

SG&A $2,449.2 $4,342.5

R&D Exp. $0.0 $0.0
EBITDA

Depreciation $41.8 $149.0

Amortization $0.0 $0.0
EBIT
Taxes (@35%)
Tax-effected EBIT

Depreciation and Amortization $41.8 $149.0

Capital Expenditures $142.2 $1,194.4
Additions to Intangibles $0.0 $0.0
Change in working capital $10.8 $271.2
Free Cash Flow

Operating Assumptions ~ Go Forward

Sales Growth 4.0%
COGS (% of sales) 25.0%
SG&A (% of sales) -1.0%
R&D Exp. (% of sales) 0.1%

Primary Expenditure Assumptions

CapEx (% of sales) 0.6%
Depreciation (% of CapEx) 0.6%
Change in Working Capital (% of ∆ sales) 0.6%
orical (2014) and projected FCFs for years 2015 - 2019

SCALED in 1000s

Cash Flow Calculation

Historical Projected
2014 2015 2016 2017 2018 2019
$11,000.0 $13,200.0 $18,480.0 $23,100.0 $28,875.0 $36,093.8
$2,397.48 $3,300.00 $4,620.00 $5,775.00 $7,218.75 $9,023.44
$8,602.5 $9,900.0 $13,860.0 $17,325.0 $21,656.3 $27,070.3

$6,376.49 $6,312.7 $6,249.6 $6,187.1 $6,125.2 $6,064.0

$0.00 $13.2 $18.5 $23.1 $28.9 $36.1
$2,382.5 $3,738.4 $7,764.4 $11,295.9 $15,692.3 $21,169.9

$156.46 $164.28 $172.49 $181.12 $190.17 $199.68

$0.0 $0.0 $0.0 $0.0 $0.0 $0.0
$2,226.0 $3,574.1 $7,591.9 $11,114.8 $15,502.1 $20,970.2
$779.1 $1,250.9 $2,657.2 $3,890.2 $5,425.7 $7,339.6
$1,446.9 $2,323.1 $4,934.7 $7,224.6 $10,076.4 $13,630.7

$156.5 $164.3 $172.5 $181.1 $190.2 $199.7

$33.0 $1,000.0 $55.44 $69.30 $86.63 $199.68
$0.0 $0.0 $0.0 $0.0 $0.0 $0.0
$68.0 $ 81.60 $ 114.24 $ 142.80 $ 178.50 $ 223.13
$1,189.5 $1,077.3 $4,592.6 $6,831.4 $9,621.1 $13,008.2
4. Calculate the value of the company based on the FCF method.
Use the template below to complete. SCALED in 1000s

FCF Valuation Method

Perpetuity Growth Method

WACC 12.0%
Terminal Growth Rate 4.0%

Year 2015 2016 2017 2018

Years into the future 1 2 3 4
FCF 1,189.5 1,077.3 4,592.6 6,831.4
NPV 1,062.0 858.8 3,268.9 4,341.5
NPV of 5-years FCF $14,990.46
Terminal Value of FCF 10,005.94
PV of TV 70,970.5

Enterprise Value 85,960.9

LED in 1000s

2019
5
9,621.1
5,459.3
14,990.5
5. Sensitivity Analysis
Perform a sensitivity analysis and compare and comment on the effect on valuation for each of the following 2 scen
a.       The weighted average cost of capital = 20%
b.      The forecasted annual increase in capital expenditures is 5% of sales for 2016 and beyond
c. Explain why the outcomes you arrived at make sense from a theoretical standpoint.
Use the template below to complete.

WACC =20%

Perpetuity Growth Method

WACC 20.0%
Terminal Growth Rate 4.0%

Year 2015 2016 2017 2018

Years into the future 1 2 3 4
FCF 1,077.3 4,592.6 6,831.4 9,621.1
NPV 897.7 3,189.3 3,953.4 4,639.8
NPV of 5-years FCF 17,907.9
Terminal Value of FCF 13,528.49
PV of TV 33,980.0

Enterprise Value 51,887.8

Explanation:

Compared to the original model (from Question #4), the WACC increasing drives down
the Enterprise value. This is caused by an increase required captial/discount rate,
reducing the related NPV.
or each of the following 2 scenarios:

es for 2016 and beyond

etical standpoint.

Capex = 5% (& orginal WACC?)

Perpetuity Growth Method

WACC 12.0%
Terminal Growth Rate 4.0%

2019 Year 2015 2016 2017 2018 2019

5 Years into the future 1 2 3 4 5
13,008.2 FCF $1,077.3 $4,555.6 $6,785.2 $9,563.3 $13,027.4
5,227.7 NPV 961.8 3,631.7 4,829.6 6,077.7 7,392.1
NPV of 5-years FCF 22,892.9
Terminal Value of FCF 13,548.47
PV of TV 96,097.1

Enterprise Value 118,990.0

Explanation:

ncreasing drives down

ptial/discount rate,
Compared to the original (from Question #4), the additional increase of CapEx
increased the FCF and drove up the NPV.
3. Using the data provided in the financial statements for Lady M, calculate the historical (2014) and projected FCFs
Partial data is provided below. Remaining data will come from the case study.
Use the template below to complete.

Ca

000s Historical
2012 2013
Sales $4,132.5 $7,491.2
COGS (excluding depr.) $1,303.4 $1,632.7
Gross Profit $2,829.1 $5,858.5

SG&A $2,449.2 $4,342.5

R&D Exp. $0.0 $0.0
EBITDA

Depreciation $41.8 $149.0

Amortization $0.0 $0.0
EBIT
Taxes (@35%)
Tax-effected EBIT

Depreciation and Amortization $41.8 $149.0

Capital Expenditures $142.2 $1,194.4
Additions to Intangibles $0.0 $0.0
Change in working capital $10.8 $271.2
Free Cash Flow

Operating Assumptions ~ Go Forward

Sales Growth 4.0%
COGS (% of sales) 25.0%
SG&A (% of sales) -1.0%
R&D Exp. (% of sales) 0.1%

Primary Expenditure Assumptions

CapEx (% of sales) 0.5%
Depreciation (% of CapEx) 0.6%
Change in Working Capital (% of ∆ sales) 0.6%
orical (2014) and projected FCFs for years 2015 - 2019

SCALED in 1000s

Cash Flow Calculation

Historical Projected
2014 2015 2016 2017 2018 2019
$11,000.0 $13,200.0 $18,480.0 $23,100.0 $28,875.0 $36,093.8
$2,397.48 $3,300.00 $4,620.00 $5,775.00 $7,218.75 $9,023.44
$8,602.5 $9,900.0 $13,860.0 $17,325.0 $21,656.3 $27,070.3

$6,376.49 $6,312.7 $6,249.6 $6,187.1 $6,125.2 $6,064.0

$0.00 $13.2 $18.5 $23.1 $28.9 $36.1
$2,382.5 $3,738.4 $7,764.4 $11,295.9 $15,692.3 $21,169.9

$156.46 $164.28 $172.49 $181.12 $190.17 $199.68

$0.0 $0.0 $0.0 $0.0 $0.0 $0.0
$2,226.0 $3,574.1 $7,591.9 $11,114.8 $15,502.1 $20,970.2
$779.1 $1,250.9 $2,657.2 $3,890.2 $5,425.7 $7,339.6
$1,446.9 $2,323.1 $4,934.7 $7,224.6 $10,076.4 $13,630.7

$156.5 $164.3 $172.5 $181.1 $190.2 $199.7

$33.0 $1,000.0 $92.40 $115.50 $144.38 $180.47
$0.0 $0.0 $0.0 $0.0 $0.0 $0.0
$68.0 $ 81.60 $ 114.24 $ 142.80 $ 178.50 $ 223.13
$1,189.5 $1,077.3 $4,555.6 $6,785.2 $9,563.3 $13,027.4