The Valuation and Financing of Lady M Confections (Second Report) Based on the financial statements of Lady M Confections and the prospect growth of the firm, you are required to: Forecast the financial statements for the years 2014 till 2019, taking into consideration the assumptions given in the case. Noting that, additional funds needed will be either invested in deposits or will be covered through short term loans. Define whether the performance of the firm is expected to improve through comparing the previous performance with the expected. You are required to tackle the important points that require improvement. Calculate the FCFs of the firm based on the assumptions given in the case. ) N E E AO A Aa bloul IS is Lady M information World Trade Center "Although Lady M is Japanese and French, I want people to think: Lady M is New York." Romaniszyn said. The World Trade Center was certainly a prestigious and iconic location in New York City, but it was not cheap. While setting up a new boutique typically costs around $600,000, Romaniszyn predicted that the construction costs for the new World Trade Center location could easily reach a million dollars. Rent was also substantially higher at this location at $310,600 with an annual escalation of 3%. On top of this, they were looking at annual utility costs of approximately $38,644 (with an annual escalation of 3%) and annual labor costs of approximately $594,750 (with an annual escalation of 5%). The space was set to be 560 square feet within a food hall of 1,000 seats. Was the prestige worth the extra cost? Based on the commercial nature of the area, Romaniszyn predicted the new World Trade Center location would have similar sales patterns to the Bryant Park location (which made $1,152,001 in revenue in 2013). In Bryant Park, not only did they get the whole-cake purchases from businessmen on their way home after work, but also the customers who purchased individual slices, who may be on their lunch break or perhaps want to have a meeting in a different location. Romaniszyn expected the World Trade Center to also have both types of sales. When asked about possible selfcannibalization Romaniszyn replied "In New York, every 10 blocks is like a different city. People don't want to go 10 blocks. Really, it's a 10-minute walk but they don't want to go. It's got to be within a two-block radius. It will make it really convenient for a lot of people to pick up cakes." In addition, Romaniszyn hoped that this new location would open the business up to corporate catering because it would be in such a large office complex. In order to decide whether the new location would L A but 21 A A BEE A. " 5 would be in such a large office complex. In order to decide whether the new location would be worth the expense, Romaniszyn and Tom decided to do a break-even analysis. They were interested in seeing how many cakes they would have to sell each day (at an average price of $80 and with cost of goods sold assumed to be 50%) in order to make a profit in the first year. In addition, they were interested in how quickly cake sales would have to grow in order to pay back their start-up costs within five years of opening the new location. Although they were hoping sales would grow by 20% per year, if the new location didn't do very well they might only see sales growth of 5%. Based on this information, they would decide whether to open the new boutique The Valuation of Lady M Aside from the new boutique decision, Romaniszyn and Tom also had to consider the offer from the Chinese investor. If they accepted the $10 million equity-stake offer, how much of their company would they be giving up? Was this offer worth it, considering they'd also lose their franchising rights to China? If they chose not to accept this offer but decided to open the new boutique, they needed to raise the money from other sources. With interest rates so low, should they instead choose to take out a bank loan? The two decided to work out some baseline assumptions to value Lady M. For the year 2014, which was only around halfway over, they assumed the following: Sales would be around $11 million. This was actually quite conservative, considering that sales growth had been 81.3% the previous year. Cost of goods sold; sales, general, and administrative (SG&A); and research and development (R&D) expenditures (all as a percent of sales) would behave similarly to 2013.. Capital expenditures would be approximately 0.3% of sales. . Additions to intangibles would , ( L behow 20 E A Aa A A EEEEE ADA " 6,49 be zero (as they also were in 2012 and 2013.) Amortization would be zero. The tax rate would be 35%. Working capital increased by $10,800 in 2012, $271,200 in 2013, and was expected to increase by $68,000 in 2014. In forecasting the next five years, Romaniszyn and Tom assumed the following: Annual sales growth would be 20% for 2015, 40% in 2016 (since the World Trade Center location would potentially be opening in late 2015), and 25% for the three years afterward. They assumed an annual sales growth rate of 4% in perpetuity. Cost of goods sold had consistently been approximately 25% of sales but had been dipping in the past two years. They expected it to remain approximately constant over the next five years. With rent and labor costs making up a large portion of their expenses, Romaniszyn and Tom expected SG&A costs to remain approximately the same as prior years, but to decrease by one percentage point each year. Although R&D costs had been negligible in the past, they decided they should probably assume some cost in the future as well, albeit only 0.1% of sales. With the prospect of opening a new store in the following year, the two decided to allocate $1,000,000 for capital expenditures in 2015. After that, however, they assumed that no new stores would be opened and capital expenditures would remain approximately 0.3% of sales.. Depreciation was expected to rise by five percentage points each year starting in 2014, becoming 100% of capital expenditures in 2019.. Additions to intangibles would be zero.. Amortization would be zero.. The tax rate would continue to be 35%.. The two expected the change in working capital to remain a constant percent of the change in sales and behave similarly to 2014. In order to do a discounted cash flow analysis, Romaniszyn and Tom assumed Lady M's weighted average cost of capital was 12%. They chose a 12x EBITDA multiple. , RI