Lady M Confectionery Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

1. How many cakes would Lady M need to sell in a year in order to break-even? Is this number feasible?
In order to maintain its profitability, Lady M will have to sell at least 6,208 units or maintain its profitability at $15,000. However in case company’s cost increases by 20% after further adjustment of perpetually calculated terminal value,it will have to shift its break-even production point to 7,101 units while maintaining the profitability at the same amount.
The company has shown strong financial performance with rise in sales of more than 81%. This means that the company is widely accepted by consumers and opening another branch will boost its profit margins even more. Given the initial reception of the company, the owners does not need to worry about making break-even sales as actual sale are currently exceeding the break-even level.
2. Calculate Lady M's enterprise value. Is the perpetuity growth rate used to calculate terminal or horizon value realistic?
The enterprise value including the debt and equity of the company stands at $13,478,925, with debt being a little part at $1,017,615 and equity being a major part at the amount $12,461,310. For the purpose of this case it feasible to be more focused on the value of equity which being high is attracting investors for the company
Lady M Confectionery Harvard Case Solution & Analysis
Perpetuity Growth rate determines the growth of the company in real terms. Given the inflationary trends of USA, it is more feasible to calculate terminal growth rate which is 4% on the assumption that inflationary rates may deviate within range of 3% to 5%. The free cash flows of the company are projected to increase over the next 5 years meaning that the liquidity of the company is increasing. Terminal value realistic pertains to liquidity of the company which is used to attract the investors or invite acquisitions.
Horizontal Value realistic pertains to integration of business activities, at same level but of different nature, and are not relevant to the case. Terminal value, on the other hand, will give a clearer picture on whether the company should sell itself to investors or not. Furthermore, the level of liquidity determined will also show the interest of the shareholders to take up stake in the company.
3. If Ken decides to accept $10 million in exchange for an equity stake to the Chinese investors, how much of an equity stake will he be giving up?
The current value of the company is stated to be $12,461,310 with potential to gain more value over the period of time. With demand increasing from Asia and South-Africa, the company has more potential to increase but will need more capital.
On the other hand, the success of the company has attracted many investors with one such offer coming from a Chinese investor at $10,000,000. This means that the company will be selling around 80% of its interest and retaining only 20%. This is not feasible as the company is losing significant voting power in itself.........................

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