Introduction

BFIN 7236 Seton Hall University

Case Study 3: Zorbas Bakeries

The Zorbas family has built a successful chain of bakeries in Cyprus. Zorbas Bakeries is considering a bold plan: take their thriving bakery business global. To test the potential for global expansion, Zorbas Bakeries is considering opening a new concept store, The French Workshop, in New York City. If successful, this concept store will provide a template for future expansion. Expanding internationally presents both opportunities and risks for Zorbas Bakeries. The question for the company is whether opening this concept store makes sense for the Cypriot company.

Instructions

For this assignment, you will be asked to take the role of Zorbas Bakeries CFO. The company is considering expanding into New York City with a new concept store: The French Workshop. Based on the information provided in the case study and the simplifying assumptions below, you will need to determine if this move makes sense for Zorbas Bakeries.

To help you with this process, please answer the following questions. Once you have completed all the questions, please upload a copy of your responses (and any appropriate Excel file showing your work) to Blackboard.

Simplifying Assumptions

To assist you with this case, you can make the following assumptions:

The appropriate discount rate for this project is 9%

The project cannot be terminated early

If Zorbas Bakeries decides to continue operating the store for more than 5 years, FCFs will grow at 2% per year

Zorbas Bakeries will decide whether to open a second store in year 2 (i.e. year 0 for the second store would be year 2 for the first store)

The initial investment required to open the second store would be $800,000, the annual fixed cost would be $225,000, and the leasing deposit would be $25,000.

For a given store age, sales at the second store would be 75% of sales at the first store (e.g. year 1 sales at store two would be 75% of the year 1 sales at store one)

All other inputs will be the same for both the first and second store (e.g. both the first and second store would have a Cost of Goods to Sales ratio of 35%)

Case Questions

Why is Zorbas Bakeries considering expanding into New York City? What are the opportunities and risks with this expansion?

Using the information in Exhibit 7, construct a pro-forma for the normal scenario.

What is the NPV of the normal scenario? Should Zorbas Bakeries expand into New York City?

In addition to the normal scenario (from question 2), construct a pro-forma for a pessimistic scenario and an optimistic scenario. For the pessimistic scenario assume that sales are 50% of the normal scenario; for the optimistic scenario assume that sales are 150% of the normal scenario.

Assume there is an equal chance of the pessimistic, the normal, and the optimistic scenario occurring. What is the expected NPV of the project? Should Zorbas Bakeries expand into New York City?

Since the New York City French Workshop store is intended as a concept store, if it is successful Zorbas Bakeries would like to open more French Workshops in the United States. Why might real options be a useful way to analyze this project?

Based on the simplifying assumptions above, construct pro-formas for opening a second store under all three scenarios (pessimistic, normal, and optimistic)

Under which scenarios would Zorbas Bakeries open the second store?

What is the real option value of opening the concept store in New York City?