Valuation and Financing of Lady M Confections Harvard Case Solution & Analysis

One Page Executive Summary

For this case, we have performed fundamental analysis, breakeven analysis and valuation of Lady M Confections to make two decisions. The first decision relates to whether the owners should open a new location in the World Trade Center and the second decision relates to whether the owners of the company should take the Chinese Investor’s Offer for $ 10 million plus a line of credit. For the first issue, we have performed breakeven analysis for opening a new location at the World Trade Center. The fixed costs comprise of rent, utility and labor costs and the contribution per unit in the first year is $ 40 per unit. Using this information, the breakeven units and the breakeven sales have been computed as shown in exhibit 1 in the appendices. The net profit for each of the five years has also been computed and the payback exercise shows that the initial investment of $ 1 million would be easily recovered within 4.69 years. In order to analyze the Chinese investor’s offer, we have performed fundamental analysis of Lady M Confections from 2015 to 2019, calculated the terminal value and valued the company using a WACC of 12%. The value of the company based on comparable method is between 2.87 m to 12.89 m. However, since the DCF valuation is based on sound assumptions therefore, we use the valuation of DCF of $ 53.51 million to evaluate the Chinese investor offer as shown in exhibit 2. If the Chinese Investor wants to acquire 100% equity stake of Lady M Confections, then the minimum acceptable price should be not less than $ 53.51 million. If the owners take up the $ 10 million offer from the Chinese investor then they should only give up 18.69% equity stake of their company as shown in exhibit 3. If the Chinese investor is agreed on this stake, then it is recommended for the owners to take up this offer plus the line of credit and use those funds in setting up new location at World Trade Center. If the Chinese investors demand a higher equity stake with $ 10 million offer, then it is recommended for the owners to reject the offer and raise the financing through a bank loan, as the interest rates were low.

Appendices

Exhibit 1: Break-even Analysis