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12.1.2017

FARID SHAHBALAYEV

LADY M CONFECTIONS

ADA University | Elmir Musayev

Question 1: Assuming sales in year one are break-even, how quickly would sales need to grow after the first year to pay the start-up costs within 5 years. Is this growth rate feasible? (Include break-even calculation for year 1 n your answer)

Rent $310,600 (annual escalation of 3%) Utility cost $38,644 (annual escalation of 5%) Labor cost $594,750 (annual escalation of 5%) Contribution Margin = 50% Break-even sale=(310,600+38,644+594,750)/50%=1,887,988 Growth rate required = 13,26% This growth rate is feasible if the company grows 20% as it’s predicted. However, there is also possibility of failing and having only 5% growth sales. 2. Prepare a financial forecast of free cash flows from 2015-2019.

ncial f 2014 $ 11,000,000 $ $ 2,397,476 $ $ 8,602,524 $ $ 6,376,493 $ $ $ $ 2,226,031 $ $ 156,457 $ $ 2,069,574 $ $ 724,351 $ $ 1,345,223 $

Sales COGS Gross Profit SG&A R&D EBITDA Depreciation Operating income (EBIT) Tax 35% After Tax Profit

Capital Expenditures $ Increase in Working Capital $ Free Cash Flows $

33,000 $ 68,000 $ 1,400,680 $

2015 13,200,000 3,300,000 9,900,000 7,519,791 13,200 2,367,009 164,280 2,202,728 770,955 1,431,773

2016 2017 2018 2019 $ 18,480,000 $ 23,100,000 $ 28,875,000 $ 36,093,750 $ 4,620,000 $ 5,775,000 $ 7,218,750 $ 9,023,438 $ 13,860,000 $ 17,325,000 $ 21,656,250 $ 27,070,313 $ 10,342,908 $ 12,697,635 $ 15,583,294 $ 19,118,180 $ 18,480 $ 23,100 $ 28,875 $ 36,094 $ 3,498,612 $ 4,604,265 $ 6,044,081 $ 7,916,039 $ 172,494 $ 181,119 $ 190,175 $ 199,684 $ 3,326,118 $ 4,423,146 $ 5,853,907 $ 7,716,356 $ 1,164,141 $ 1,548,101 $ 2,048,867 $ 2,700,724 $ 2,161,977 $ 2,875,045 $ 3,805,039 $ 5,015,631

1,000,000 $ 81,600 $ 514,454 $

55,440 $ 114,240 $ 2,164,791 $

69,300 $ 142,800 $ 2,844,064 $

86,625 $ 178,500 $ 3,730,089 $

108,281 223,125 4,883,909

3. Estimate Lady M’s enterprise value using DCF method

Discounted Cash flows

$

Enterprise Value

$ 63,169,976

1,400,680 $

459,334 $

1,725,758 $

2,844,064 $

3,730,089 $

Terminal value 4,883,909 $ 48,126,142

Terminal Value= FCF of last year*(1+g)/(discount rate-g) 4. Do you think they should take the Chinese investors’ offer? Why/why not? The interest of business loans in the US is 3.25%, which means for Lady M company it is cheaper and better to focus borrowing rather than issuing new equity. Additionally, accepting Chinese investors offer will result in losing their franchising right. Lady M should reject Chinese investor’s offer.