Business Analysis and Valuation (BAV) BM D & IEV (23-25) Term 4

Business Analysis and
Valuation (BAV)
BM D & IEV(23-25) Term 4
N.Sivasankaran
Session 1
Section F
For Discussion in this Course
• DCF Valuation
• DDM Valuation
• APV
• Relative Valuation
• Fundamental Analysis
Evaluation Framework
• End Term : 35%
• Mid Term : 35 %
• Class Participation: 10%
• Group Assignment : 20% ( group of Four members )
Cases for discussion in the course
1. The Valuation and Financing of Lady M Confections
2. Monmouth, Inc
3. Mercury Athletic Footwear Inc: Valuing the
Opportunity
4. Pinkerton (A)
5. Sampa Video Inc
For Discussion in S 1 & S2
• Basics of Valuation
• Introduction to Discounted Cashflow (DCF)
Valuation
• Case on “The Valuation and Financing of Lady
M Confections”
Basics of Valuation
• What are we valuing?
Basics of Valuation
• What is KEY to successful investing?
• Why should someone buy a Financial Asset?

Basics of Valuation
• Which one is Important
(a) Product of Valuation
(b) Process of Valuation?
Basics of Valuation
• To WHOM are we valuing an Operating Asset?
Basics of Valuation
What are the inputs required for valuing an Operating Asset under
Discounted Cash Flow (DCF) approach?
Basics of Valuation
• What is the appropriate Cashflow for Valuing the FIRM?
Basics of Valuation
• What is the appropriate Discount Rate for Valuing the FIRM?
Basics of Valuation
• What is the appropriate Cashflow for Valuing the EQUITY CLAIMS of
a firm?
Basics of Valuation
• What is the appropriate discount rate for Valuing the EQUITY
CLAIMS of a firm?
Basics of Valuation
• What are the types of firms in DCF framework ?
Case on “ Valuation and Financing of
Lady M Confections”
Lady M Confections
• Who are the decision makers in Lady M case?
• What is the business of Lady M ?
• What is the Significance of May 2014?
• Why did investors keep calling on a daily basis?
• What was the offer from the Chinese Investor?
Why was it timely for the firm?
Lady M Confections
• What were the questions in the minds of the decision makers?
Lady M Confections
• When was it founded?
• When did it open its first Boutique?
• How did Lady M cakes differ from that of its competitors?
• What was its signature dessert?
• What was the significance of June 2012 , July 2013 & August 2013?
• What was the composition of the employees in 2014?
• How many crepes per day were churned out by the kitchen staff?
• How much time was taken by the kitchen staff to go through 1 imported
crepe pan?
• How much time was taken by LM to recruit and train a pastry chef?
Lady M Confections
• What was the growth rate in sales in 2013?
• What was its profit margin in 2013?
• Who stated “ sometimes we joke that we’re not
a cake company, we are a crepe company” &
what is the significance of this statement?
• Who were the closer competitors of LM?
Lady M Confections
• How much was the typical cost of setting up a boutique at WTC?
• What was the expected construction cost for the proposed boutique
at WTC?
• What was the expected annual Rent amount & its escalation rate?
• What was the annual utility costs & its escalation rate?
• What was the annual labor costs & its escalation rate?
• What was the expected annual sales from the proposed new
boutique in WTC?
• What were the expected types of customers at WTC boutique?
Lady M Confections
• What was the expected S.Price/Cake?
• What was the expected CGS per cake?
• What was the expected growth rate in revenue from the WTC
boutique?
• What are your inferences from Ex 2(a) to 2(d)
• What were the assumptions in financial projections for 2014?
• What were the assumptions in financial projections for 2015
onwards?
Questions for Discussions
1. Number of cakes to be sold in the first year by Lady M to
get break-even? Find out the BEP in sales revenue? Is it
feasible for Lady M to achieve the BEP ?
2. Assuming sales in year 1 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?
Questions for Discussion
3. Should Lady M open the shop in the new location in
WTC?
4. What is Lady M's Enterprise Value? Does it matter if

one uses EBITDA multiple or Perpetuity Growth
Formula for computing the Terminal Value? How much
of the equity stake should they be giving up to the
chinese investor?
Questions for Discussion
5. Do you think that they should take the chinese investor's offer ? Why or Why not?
6. Perform the sensitivity analysis under the perpetuity growth and EBITDA Multiple
(a) If WACC= 14% (b) if capex is 5 % of sales from Year 2 -Year 5 (c) if WACC=14% &
CAPEX is 5% of sales from Year 2 -Year 5
7. Assuming Lady M China is worth 1/4 of the equity value of Lady M, find out the
value and % of stake given up to investor in Lady M under the following scenarios
(a) Lady M retains 0% of LMC
(b) Lady M retains 25% of LMC
(c) Lady M retains 50% of LMC
Lady M Confections
Number of cakes to be sold in the first year by Lady M to
get break-even? Find out the BEP in sales revenue? Is it
feasible for Lady M to achieve the BEP ?
BEP (in no of cakes) & (in $)
Selling Price/ Cake = $80
CGS/Cake = $40
CPU = $40
Contribution Margin Percent =
(CPU/S.P )*100 = (40/80)*100 = 50%
Fixed Cost In $(based on expected year 1 Figures (page 2&3 of the
case)
Rent = 310600
Utilities = 38644
Labor Costs =594750
Depreciation (construction cost assuming zero salvage value and 5
years life under SLM) = 200000
Total Fixed Cost = 1143994

• BEP (no of cakes) = FC/CPU = 1143994/40 = 28600 Cakes
• BEP in $ = FC/CMP = 1143994/0.50 = $ 2287988
Or 28600*80 = $ 2288000
• Expected Sales (page 3 of the case) in $

= 1152001 *2 = $ 2304002
Expected sales in units = 2304002/80 = 28800 cakes

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Business Analysis and

• Why should someone buy a Financial Asset?

2. Assuming sales in year 1 are break even , how quickly

4. What is Lady M's Enterprise Value? Does it matter if

Total Fixed Cost = 1143994

• Expected Sales (page 3 of the case) in $

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