Reference no: EM133677541

Assignment

Background:

Ken Romaniszyn, the owner of Lady M Confections is faced with two difficult decisions. The first is whether to open a new boutique in the new World Trade Center, a location with great potential for sales, but also with substantially larger capital costs and rent costs. The second decision is whether to accept an offer of $10 million and a line of credit from a Chinese investor, in exchange for an equity stake in the company and exclusive franchising rights to China. The decision of whether to open the new boutique is also dependent on the decision of whether to accept the Chinese investor's offer. If Romaniszyn chooses to open the new boutique, the funding must be secured, either from the investor or from another source.

This case explores the decision-making process that small, private businesses must undertake when considering an expansion and when selling equity to outside investors.

This case represents an opportunity to learn how to evaluate a private business.

Address the following questions:

A. How many cakes would Lady M need to sell in a year in order to break-even? Is it feasible?

B. 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 feasible?

C. What is your recommendation about opening the new location?

D. What is Lady M's enterprise value? How much of an equity stake should they be giving up to the Chinese investors?

E. What do you think of Romaniszyn's and Tom's baselines assumptions?

F. Do you think they should take the Chinese investors' offer? Motivate your answer.