Lady M Valuation Case Study

Team 5

Hanlu Hu

Siyu Lin

Yiran Zhang

Shanshan Du

Lady M Valuation Case Study

Projected Five-Year Free Cash Flow

Free cash flow is the cash flow generated by the firm after supporting operation, meeting the reinvestment needs and paying taxes; it is a profitability indicator that excludes the non-cash expenses in the income statement and includes capital expenditures, and changes in working capital. In general, earnings before interest and taxes (EBIT) is used as the basis for calculating the company's free cash flow: . As for earnings before interest and taxes, it is sales revenue minus costs of sales and other expenses, excluding interest and taxes. Therefore, we can derive free cash flow from the projected income statement.  [pic 1]

Currently, Lady M has to make two distinctive choices of whether to accept the offer from the Chinese investor and whether to open a new branch in New York. In order to solve these problems, we need to evaluate Lady M’s net worth. The first step of valuation is to forecast future free cash flow. To do that, we need to make a few assumptions, which are clearly stated in the case. Figure 1 is a summary of the primary assumptions. Based on these assumptions, we can calculate the future five-year sales revenue first: Then, operating expenses, non-operating expenses, depreciation, changes in working capital and capital expenditures can all be computed because their projections are percentages of sales. The projected results above are shown in Figure 2. Next, applying the free cash flow formula above, we can calculate the five-year free cash flows forecast (Figure 3).  [pic 2]

Enterprise Value by Two Methods

The second step of valuation is to calculate the terminal value under the multiples method and the perpetuity method. The terminal value in multiples method is computed by using the EBITDA multiple:   (Figure 4). As for the perpetuity method, it presumes that the free cash flow will grow at a constant rate perpetually. We can use the Gordon Growth Model to calculate the terminal value:  The growth rate, WACC, and the terminal value are shown in Figure 5. After calculating the free cash flows and the terminal value, we need to discount them by WACC to the present. The terminal value is on year five; therefore, the present value of the terminal value is: . The enterprise value of Lady M is the sum of the present values of 5-years free cash flows and the terminal value, as displayed in Figures 6 and 7. [pic 3][pic 4][pic 5]