the valuation and financing of lady m confections case study

Hi all,

In May 2014, Lady M Confections (Lady M) is experiencing explosive growth. Founded in May 2001 in New York City, Lady M opened its first retail location in December 2004, in Manhattan. Rapid growth started in the 2010’s, with Lady M opening additional NYC retail locations in June 2012 and July 2013 and a Los Angeles location in August 2013. This growth so far underscored the success of the specialty bakery, that had also licensed partners in both Singapore and South Korea. Now, founder and CEO Ken Romaniszyn needs to consider both whether a fifth location in the new World Trade Center, to open in early 2015, makes economic sense; and what to make of an investment offer of $10,000,000 and a line of credit in exchange for an ownership stake in Lady M and exclusive franchise rights in the PRC (People’s Republic of China).

As stated in the case, Mr. Romaniszyn wants the World Trade Center store to break even in its first year of operation and to be able to payback its investment costs of $1,000,000 in at most five years. Is that possible? Why or why not? Should Lady M have a location in the WTC?

As for the investment offer, the core question is how much of Lady M should Mr. Romaniszyn part with in exchange for the capital infusion. Note that this question ought to include considering the value of the exclusive franchising deal in the PRC. Givenyour estimation of the value of Lady M as it stands right now as well as the potential value of the PRC market, and of the capital needs of Lady M ($1,000,000 to open at the WTC, to begin with), should Mr. Romaniszyn accept the offer, and under which conditions?

NOTE: while the case has all the necessary data to calculate cash flows and NPVs, use instead the following estimates of free cash flow for 2015 – 2019 and for the terminal value of the firm. In addition, assume a discount rate of 12%, as chosen by Mr. Romaniszyn.

2015

2016

2017

2018

2019

Terminal (2020 – ++)

$1,135,000

$2,700,000

$3,500,000

$4,600,000

$6,000,000

$6,000,000* ((1+ terminal growth rate) / (discount rate – terminal growth rate))

ANOTHER NOTE: The two core assumptions that can be explored with the numbers above are the rate of growth and the discount rate. In addition, you should consider what fraction of the terminal value of Lady M might result from the PRC market, and include it in your analyses.

You should develop, with your course partner, a one page report on your conclusions about the above. It should be single spaced, with 1” margins, and preferably Times New Roman 12 pt. Please do not exceed the one page limit. You are welcome to add any Appendixes you believe would be useful. Your name(s) and Cornell email address(es) should be printed at the top of the page; along with the title of the case. The report (and appendices) should be hardcopy, and turned in to your TA at the end of class.

Important: Please do not copy case wording onto your report! We know what the case says, and you have precious little space for your recommendation.

We will spend Wednesday 2/12 class discussing the case. If you are prepared, it should be fun…