Reference no: EM132175433

Question - This is an important question facing owners of private businesses, especially if they are contemplating selling an ownership interest in the firm. It is also important for fundamental analysts (e.g., Warren Buffet) who want to know the true value of a company's stock.

This case study requires you to build on your skills from the Bubble & Bee case to develop pro forma financial statements, and then apply what you've learned about time value of money in order to estimate the present value of the cash flows the company is expected to generate.

Read the case study, and complete the following analyses:

1. Calculate the break-even point in daily cake sales for the proposed new location at the World Trade Center.

2. Complete a discounted cash flow (DCF) analysis to determine the value of the company.

Once you have done that, answer the following questions:

1. What is the break-even point in daily cake sales for the new location? Do you think this is realistic?

2. Do you think Romaniszyn should go forward with opening a shop at the World Trade Center?

3. What is the value of the company? How much of an equity stake should Romaniszyn be willing to give the Chinese investor for $10M?

4. Do you think Romaniszyn should take the investor's offer? Why or why not?

A few suggestions:

1. The historical financial statements provided are a little quirky. I recommend you focus your time on developing the 2014 - 2019 financial statements. Don't spin your wheels trying to figure out why Exhibit 2b doesn't seem to add up. Make your SG&A expenses for 2012 and 2013 the large numbers shown in Exhibit 2b (2.449M and 4.342M respectively).

2. Create a template for your forecast first, based on the assumptions given in the text of the case. Don't try to make your template look like Exhibit 2b -- we don't have assumptions for all those different accounts.

3. Focus on forecasting the income statement. Assumptions for changes in net working capital and capital expenditures are given, so you do not need to forecast balance sheets or cash flow statements. Simply create space to incorporate those cash flows under your forecasted income statements.

4. Once you're done, treat 2014 as a historical statement, even though according to the case we are in the middle of 2014. So in other words, the end of 2015 is t=1.

5. Pay careful attention to the bullet point regarding assumptions for depreciation on p. 4: you'll need to use this to work backwards to figure out what % of capital expenditures is used to calculate depreciation in 2014.

OK, that should be enough to give you a good start. Good luck!