# 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

WORLD TRADE CENTER LOCATION BREAKEVEN ANALYSIS
2014 2015 2016 2017 2018 2019
Construction Cost for New WTC 1000000
Rent 310600 319918 329516 339401 349583 360071
Utility Costs 38644 39803.3 40997.4 42227.3 43494.2 44799
Labor Costs 594750 624488 655712 688497 722922 759068
Total Fixed Costs 943994 984209 1026225 1070126 1116000 1163938
2014 2015 2016 2017 2018 2019
Revenue 1152001 2362101 2462940 2568302 2678399 2793451
Cost of Sales (Variable Costs are 50% of sales) 576001 1181051 1231470 1284151 1339199 1396726
Contribution 576001 1181051 1231470 1284151 1339199 1396726
Average Price 80 96 115.2 138.24 165.888 199.066
Variable Costs (50%) 40 48 58 69 83 100
Contribution per unit 40 48 58 69 83 100

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

 WORLD TRADE CENTER LOCATION BREAKEVEN ANALYSIS 2014 2015 2016 2017 2018 2019 Construction Cost for New WTC 1000000 Rent 310600 319918 329516 339401 349583 360071 Utility Costs 38644 39803.3 40997.4 42227.3 43494.2 44799 Labor Costs 594750 624488 655712 688497 722922 759068 Total Fixed Costs 943994 984209 1026225 1070126 1116000 1163938 2014 2015 2016 2017 2018 2019 Revenue 1152001 2362101 2462940 2568302 2678399 2793451 Cost of Sales (Variable Costs are 50% of sales) 576001 1181051 1231470 1284151 1339199 1396726 Contribution 576001 1181051 1231470 1284151 1339199 1396726 Average Price 80 96 115.2 138.24 165.888 199.066 Variable Costs (50%) 40 48 58 69 83 100 Contribution per unit 40 48 58 69 83 100