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 2015 2016 2017 2018 2019
Sales $ 11,000,000 $ 13,200,000 $ 18,480,000 $ 23,100,000 $ 28,875,000 $ 36,093,750
COGS $ 2,397,476 $ 3,300,000 $ 4,620,000 $ 5,775,000 $ 7,218,750 $ 9,023,438
Gross Profit $ 8,602,524 $ 9,900,000 $ 13,860,000 $ 17,325,000 $ 21,656,250 $ 27,070,313
SG&A $ 6,376,493 $ 7,519,791 $ 10,342,908 $ 12,697,635 $ 15,583,294 $ 19,118,180
R&D $ - $ 13,200 $ 18,480 $ 23,100 $ 28,875 $ 36,094
EBITDA $ 2,226,031 $ 2,367,009 $ 3,498,612 $ 4,604,265 $ 6,044,081 $ 7,916,039
Depreciation $ 156,457 $ 164,280 $ 172,494 $ 181,119 $ 190,175 $ 199,684
Operating income (EBIT) $ 2,069,574 $ 2,202,728 $ 3,326,118 $ 4,423,146 $ 5,853,907 $ 7,716,356
Tax 35% $ 724,351 $ 770,955 $ 1,164,141 $ 1,548,101 $ 2,048,867 $ 2,700,724
After Tax Profit $ 1,345,223 $ 1,431,773 $ 2,161,977 $ 2,875,045 $ 3,805,039 $ 5,015,631

Capital Expenditures $ 33,000 $ 1,000,000 $ 55,440 $ 69,300 $ 86,625 $ 108,281

Increase in Working Capital $ 68,000 $ 81,600 $ 114,240 $ 142,800 $ 178,500 $ 223,125
Free Cash Flows $ 1,400,680 $ 514,454 $ 2,164,791 $ 2,844,064 $ 3,730,089 $ 4,883,909

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

Terminal value
Discounted Cash flows $ 1,400,680 $ 459,334 $ 1,725,758 $ 2,844,064 $ 3,730,089 $ 4,883,909 $ 48,126,142

Enterprise Value $ 63,169,976

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.