Question

Kim has a company called Daisy Cakes where she makes cakes with her grandmother with fresh ingredients. Kim invested $93,000 in the company. Kim sells the cakes for $44.50 on her website and it takes $18 to make the cakes. Kim's sales in three months (October, November, and December) was $27,000, however, she is seeking for an investor to invest $50,000 in her company in exchange for 25% equity. Barbara, an investor, agrees to invest $50,000 in her company under one condition: For every cake Kim sells she must mail Barbara a dollar, so by the time Kim sells 50,000 cakes Barbara has her money back.

1) Based on the deal, what is the value/price of the company?

2) Prepare a balance sheet after the deal. What are the assets, the liabilities and the Equity? Separate the Equity section into Kim’s and Barbara’s equity in the company. For the valuation of the liability (what DaisyCakes has to pay to Barbara) use your knowledge about time value of money. Assume a 10% discount rate. Hint: Round up the numbers of cakes sold per year to the next full 100s.

3) “Guesstimate” the company’s current annual sales, and net income. Prepare a budgeted Income Statement. We do not really know how if the $18 she quotes include things like the electricity, depreciation or a salary to Kim, herself, and her mother. So, for now, let’s go with the information we got from above.

4) Based on this Balance Sheet and Income Statement, calculate the Profit Margin and RoI and Residual Income (assume 10%) for the overall company after Barbara’s investment.

5) Based on your findings above, what is the actual valuation of the company? In other words, what are the Net Assets?

Answer 1

Requirement.

1. As Kim is Ready to sell 25% Stake in the company for $50,000, which means the company is valued at $200,000 (50000/25%)

2.

Balance Sheet of Daisy Cakes
Equity & Libilities	Amount	Assets	Amount
Equity :-		Cash	1,59,074
Kim	93,000
Barbara	50,000
Profit	16,074
Liability:-
Amount Due To Barbara *	21,283
Total	1,59,074	Total	1,59,074
* As the Amount to Barbara will Only become due when a cake is sold
Therefore, it will not be recognised as liability, until sale of cakes.

3.

Current Annual Sales.
3 Months Sale	27000
1 month sale	9000
12 months Sale	108000
Income Statement
Annual Sales	$         1,08,000
Cake Price	$                 44.5
No. of Cakes Sold	2,427
Cost of a Cake	$                     18
COGS	$             43,686
Annual Income	$             64,314
Budgeted Income Statement
No. of Cakes Sold*	2,500
Cake Price	$                 44.5
Annual Sales	$         1,11,250
Cost of a Cake	$                     18
To be paid to Barbara	$                       1
COGS	$             47,500
Budgeted Annual Income	$             63,750
* (To be rounded off to next 100)

4.

a. Profit Margin:

= (64314/108000)*100

=59.55%

b. ROI

= (64314/50000)*100

=128.628%

c. Residual Income.

=64314- (50000*10%)

=$59,314.

5. Valuation of Company/ Net Assets

Nets Assets = Assets - Liabilities

= 159074-21283

=$137,791.