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 lso dependent on the decision of whether to accept the Chinese investors 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: How many cakes would Lady M need to sell in a year in order to break-even? Is it feasible? Assuming sales in year one are break-even, how quickly would sales need to grow after the firstyear to pay the start-up costs within 5 years? Is this feasible? What is your recommendation about opening the new location? What is Lady Ms enterprise value? How much of an equity stake should they be giving up to theChinese investors? What do you think of Romaniszyns and Toms baselines assumptions? Do you think they should take the Chinese investors offer? Motivate your answer. Share on Facebook Tweet Follow us Sample Answer Evaluating Expansion Options for Lady M Confections Lady M Confections, a renowned bakery, faces crucial decisions regarding its expansion plans and potential partnership with a Chinese investor. Analyzing the financial implications and strategic considerations involved in these decisions is essential for the long-term success and growth of the business. 1. Break-Even Analysis: To determine the number of cakes Lady M needs to sell annually to break even, a detailed cost analysis must be conducted considering fixed costs, variable costs per cake, and the selling price. This calculation will help assess the feasibility of achieving profitability solely through cake sales. 2. Growth Projection: If sales in the first year are break-even, Lady M would need to achieve substantial sales growth in subsequent years to recoup start-up costs within a 5-year timeframe. Evaluating market demand, competitive landscape, and consumer trends will be crucial in determining the feasibility of such rapid sales growth. 3. Recommendation on New Location: Considering the high capital and rent costs associated with opening a boutique in the World Trade Center, Lady M should conduct a thorough cost-benefit analysis. Assessing potential foot traffic, target market reach, and brand positioning in that location will be vital in making an informed decision on whether to proceed with the new boutique. 4. Enterprise Value and Equity Stake: Calculating Lady M’s enterprise value involves assessing its assets, liabilities, projected cash flows, and market potential. Determining the appropriate equity stake to offer the Chinese investor requires balancing the investment amount with the value brought in terms of market access and growth opportunities. 5. Assessment of Baseline Assumptions: Reviewing Romaniszyn’s and Tom’s baseline assumptions regarding market trends, operational costs, revenue projections, and risk factors is critical. Ensuring that these assumptions are realistic and based on thorough market research will enhance the accuracy of financial forecasts and strategic planning. 6. Decision on Chinese Investor Offer: The decision to accept the Chinese investor’s offer should be evaluated based on various factors, including the alignment of strategic objectives, financial terms, control over business operations, and long-term growth potential. Assessing the investor’s track record, credibility, and potential synergies with Lady M’s business model will be key in determining the viability of the partnership. In conclusion, Lady M Confections stands at a critical juncture in its expansion strategy, requiring careful financial analysis, strategic planning, and risk assessment to make informed decisions. By conducting thorough due diligence and seeking expert advice where necessary, Lady M can navigate these challenges effectively and position itself for sustainable growth and success in the competitive bakery industry. This question has been answered. Get Answer
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