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# 12.1.

2017

FARID
SHAHBALAYEV

## 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

## 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

## 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.