This case study discusses the financial analysis of Lady M Confections. The analysis will assist in determining the financial and operational strength of the company, which may lead to future growth and prosperity.
Mihir A. Desai; Elizabeth A. Meyer
Harvard Business Review (215047-PDF-ENG)
June 18, 2015
Case questions answered:
Case study questions answered in the first solution:
- How many cakes would Lady M Confections need to sell in a year in order to break even? Does this number seem feasible?
- 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?
- What is your recommendation? Should Romaniszyn open a new location in the World Trade Center?
- What is Lady M’s enterprise value? How much of an equity stake should they be giving up to the Chinese investors?
- What do you think of Romaniszyn’s and Tom’s baseline assumptions? Are they realistic?
- Do you think they should take the Chinese investors’ offer? Why/why not?
Case study questions answered in the second solution:
- Based on the financial statements of Lady M Confections, you are required to perform the following analysis by comparing the performance of the year 2012 with 2013:
Common size analysis
Percentage change analysis
Du Pont system
- Your analysis should be comprehensive and should provide a broad view of the performance of the company.
Case study questions answered in the third solution:
- How many cakes would Lady M have to sell in the first year in order to break even? Does it seem feasible based on the actual situation?
- How quickly would cake sales have to grow in order to pay back their start-up costs within five years? Is this growth rate feasible?
- Recommendation: Should Romaniszyn open a new location in the World Trade Center?
- How much Lady M was worth (Lady M’s equity value and enterprise value). How much of an equity stake would the Chinese investor get for that amount?
- Should Lady M take the Chinese investors’ investment?
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The Valuation and Financing of Lady M Confections Case Answers
This case solution includes an Excel file with calculations.
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Executive Summary – The Valuation and Financing of Lady M Confections
In order to solve this case, a break-even analysis was developed and Lady M Confections enterprise was valued with the objective of making two fundamental decisions, the first related to the decision that the owners must make about opening a new location in the World Trade Center and the second decision based on accepting the offer of Chinese investors for $ 10 million-plus line of credit.
In relation to the opening of the new boutique, the project seems viable, since from a 13.19% sales growth rate the company can recover its initial construction costs in 5 years. This rate is quite conservative and fits the historical growth of the company.
Finally, it is recommended that the company ask for a bank loan at a low-interest rate, instead of accepting the offer of Chinese investors, to which it would have to give a large part of its equity- stake (30% or more depending on the value of the company).
Part 1. Exhibits from Case “The Valuation and Financing of Lady M Confections” – please see attached Excel spreadsheet.
1. How many cakes would Lady M Confections need to sell in a year in order to break even? Does this number seem feasible?
Exhibit 1a- Break-Even Point Analysis of Lady M Confections for 2014
Exhibit 1b: Break-Even Point Analysis of Bryant Park Location for 2013
Answer: Considering the break-even analysis shown above, for which a cake price of $ 80 and a cost of goods sold of 50% of gross sales is assumed, reveals that the gross sales of the new location for 2014 will be $ 1,887,988. Thus, for the indicated sale price, Lady M Confections must sell 23600 cakes per year or 65 units per day, to achieve break-even in order to make the opening of the new location worthwhile. (Exhibit 1a)
To determine, if the breakeven point for the World Trade Center is feasible, an analysis was made based on the semiannual sales reached in 2013 by the Bryant Park location allows predicting annual sales of approximately $ 2,304,001. Thus, considering the sale price of $ 80, Bryan Park sells approximately 28800 cakes annually or 79 units daily. Therefore, the breakeven point of the new location seems feasible by requiring a number of units sold lower than the sales required by Bryan Park.
2. 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?
Exhibit 2a – Break-Even Point Analysis for Optimistic Scenario (growth rate of 20%)
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