GOLDEN GATE UNIVERSITY

SAN FRANCISCO

ACADAMIC YEAR: 2023

DEPARTMENT: MASTER OF BUSINESS

ADMINISTRATION

THE VALUATION AND FINANCING OF LADY M CONFECTIONS

CASE STUDY

EXCEL DRIVE LINK:

https://docs.google.com/spreadsheets/d/1HbZt0MhtFP8DfF
51WUSD-BrTBUS6TfEtzxKhpTML_kg/edit?usp=sharing

SUBMITTED BY: ANKIT SINGH

Summary:

The article "The Valuation and Financing of Lady M Confections" presents a detailed
analysis of the financial considerations surrounding Lady M Confections, a company
specializing in cakes and confectionaries. The analysis revolves around two key
decisions: whether to open a new location in the World Trade Center and whether to
accept an offer from Chinese investors.

Firstly, the article conducts a break-even analysis to determine the number of cakes
Lady M Confections would need to sell in order to cover its costs at the new location.
Based on a cake price of $80 and a cost of goods sold at 50% of gross sales, the
break-even point is calculated at 23,600 cakes per year. This number is deemed
feasible, considering historical sales data and market analysis. Additionally,
projections suggest that the new location could achieve profitability within 5 years,
making it a viable opportunity.

Regarding the Chinese investors' offer, the article evaluates Lady M's enterprise
value using different valuation methods. The enterprise value ranges from
$22,493,170.38 to $31,878,600.72, depending on the valuation method employed.
However, rather than accepting the offer and giving up a significant equity stake, the
recommendation is to seek a bank loan at a low interest rate. This would allow Lady
M to retain control over its equity ownership while accessing the necessary capital for
expansion.

Furthermore, the article assesses the baseline assumptions made by Lady M's
management team, Romaniszyn and Tom. These assumptions, including sales
growth rates, expenses, and capital expenditures, are deemed realistic and aligned
with the company's historical performance and industry standards. The analysis
indicates that Lady M has the operational capacity to achieve the projected sales
growth and manage its expenses effectively.

In terms of financial analysis, the article provides a comprehensive overview,

including ratio analysis, common size analysis, percentage change analysis, and
DuPont analysis. These analyses reveal positive trends in liquidity, profitability, and
efficiency, indicating the company's overall financial strength and growth potential.

Findings

1. How many cakes would Lady M need to sell in a year to break even? Does this
number seem feasible?

Answer: Lady M Confections would need to sell 23,600 cakes per year to break even
at the new location in the World Trade Center. This number equates to approximately
65 cakes per day. Whether this number is feasible depends on various factors such
as foot traffic in the area, customer demand, and the effectiveness of marketing
strategies. However, given the company's historical performance and assuming a
conservative sales growth rate, achieving this level of sales seems feasible,
especially considering the potential visibility and customer base in a high-traffic
location like the World Trade Center.
2. What is your recommendation? Should Romaniszyn open a new location in the
World Trade Center?

I recommend that Romaniszyn opens a new location in the World Trade Center. The
break-even analysis suggests that the new boutique has the potential to be
profitable, and with a growth rate of 20% or more, the initial investment could be
recovered in less than four years. Additionally, considering the historical growth rates
and market opportunities, opening a new location in such a prime area like the World
Trade Center seems promising for Lady M Confections. However, Romaniszyn
should conduct a thorough market analysis and consider factors such as lease terms,
competition, and operational costs before making a final decision.

3. What is Lady M’s enterprise value? Does it matter if one uses an EBITDA
multiple or a perpetuity growth formula for a terminal value? How much of an
equity stake should they give to the Chinese investors?

Lady M Confections' enterprise value ranges from $22,493,170.38 to

$31,878,600.72, depending on whether the EBITDA multiple or a perpetuity growth
formula for a terminal value is used. The choice of valuation method can significantly
impact the valuation. If using the EBITDA multiple, the company's value might be
inflated as it doesn't account for interest, taxes, depreciation, and amortization
expenses. Regarding the equity stake to be given to the Chinese investors, it would
range from 32.40% to 46.56%, based on the valuation method used and the initial
investment offered. Romaniszyn should carefully evaluate the terms of the
investment and consider its impact on ownership and control of the company.

4. What do you think of Romaniszyn’s and Tom's baseline assumptions? Are they
realistic?

Romaniszyn's and Tom's baseline assumptions appear to be realistic and aligned

with the company's historical performance. The growth rates, expenses, and capital
expenditures considered in their analysis seem reasonable and grounded in past
data. However, they should continue to monitor market conditions and adjust their
assumptions accordingly to ensure the accuracy of their projections.

5. Do you think they should take the Chinese investors' offer? Why/why not?

Whether Lady M Confections should take the Chinese investors' offer depends on
various factors, including the terms of the offer, the company's growth prospects, and
its long-term strategic goals. While the investment could provide much-needed
capital for expansion, it would also involve giving up a significant equity stake.
Romaniszyn and Tom should carefully evaluate the potential benefits and risks of
accepting the offer, considering alternative financing options and the impact on the
company's ownership structure and decision-making processes. Additionally, they
should negotiate favorable terms that align with the company's objectives and long-
term vision.
Conclusion:

The ratio analysis, common size analysis, percentage change analysis, and the
DuPont Analysis of Lady M Confection Company provide information on the financial
strength and the growth of various components of the company. However, it is
analyzed that the company has managed to enhance its performance in comparison
to the previous years and the profitability of the company has inclined as compared
to the previous year. Hence, the analysis provided the comprehensive picture of the
company according to its financial and operational management activities which are
determined through a comprehensive analysis of the company above.

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