Case analysis: Growing up in China: The Financing of BabyCare Ltd.

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FNAN 441

George Mason University

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Growing up in China: The Financing of BabyCare Ltd. Valuing investment projects are often computed using the DCF approach, forecasting future revenue and costs by applying a percent-of-sales methodology. There are many industries where using the percent-of sales method is inappropriate, because sales are based on subscriptions with customers, not aggregate growth information. There are many industries in which the cash flows are dependent on customers coming and going. Some examples include Sirius XM Radio, magazine subscriptions, cell phone contracts, advertising, water systems, snack food kiosks, etc. An alternate approach, and one that is better suited for these types of companies, is the subscriber model. The BabyCare case provides an opportunity for you to develop a detailed cash flow model for a fastgrowing startup company. Given the subscription nature of the BabyCare business model along with its limited and varied operating history, a subscriber model is the most logical method of forecasting future BabyCare cash flows. With this methodology, you must determine the expected cash flows associated with the tenure of an individual subscriber, produce a forecast of the number of new subscribers that the company expects to acquire based on their forecast to secure third-round financing, aggregate the expected cash flows associated with the projected new subscribers, and account for the company’s fixed expenses. Specifically, the analysis involves: 1. Reverse engineering the revenue forecast to determine the implied number of new subscribers expected in 2002 through 2007 2. Determining the value of a new BabyCare subscriber 3. Constructing aggregate expected cash flows based on the forecasted acquisition of new subscribers and the company’s fixed operating expenses 4. Analyzing the sensitivity of the valuation and cash flow forecasts to the various assumptions made in the constructed subscriber model This case highlights the importance of understanding the dynamic interactions of individual customer cash flow requirements and the company’s growth oriented business plan. Interactions between the company’s business plan and financing plan cannot be avoided and trade-offs between them must be made. Topics to Address in Your Case Analysis and Write Up (All students (groups of two for this case) submit a formal case analysis, including supporting spreadsheets) 1. How is (or isn’t) BabyCare’s business model tailored to the idiosyncrasies of an emerging market? 2. Construct an annual subscriber model for BabyCare that can be used to forecast the expected revenues for a new subscriber through 2007. What critical assumptions does the subscriber model rely on? Which assumptions would you question as a venture capitalist? How would you defend them as the entrepreneur? 3. What is the value of a new BabyCare subscriber? (Assume a discount rate of 20%, and a terminal growth rate of 3%) 4. Does a discount rate of 20% make sense? Why, or why not? If you were to construct your own discount rate, what would it be and why? How would that affect the value? 5. Does a terminal growth rate of 3% make sense? Why, or why not? If you were to construct your own terminal growth rate, what would it be and why? How would that affect the value? 6. How much cash does BabyCare need to have a reasonable chance of achieving its long-run objective? 7. Assuming that BabyCare does not change its forecast projections, what is the value of BabyCare? Much of the information provided in this document has been extracted from the Teaching Note for the case from Harvard Business Publishing as a guide for students. Copying or posting outside of FNAN441 is an infringement of copyright. Growing up in China: The Financing of BabyCare Ltd. 8. Is building a plant to manufacture products locally a good idea? 9. How would you evaluate BabyCare’s funding opportunities? 10. Would you invest in BabyCare? STRUCTURE for the paper: 1. Executive Summary (including your recommendation) 2. A statement of the problem(s) you see the firm or decision maker facing 3. Methodology or techniques (those that you believe are best for this problem and that you recommend employing) 4. Data requirement or sources (those necessary to employ your recommended technique) 5. Key assumptions (those you had to make to conduct your analysis) 6. Analysis 7. Conclusions and concerns Much of the information provided in this document has been extracted from the Teaching Note for the case from Harvard Business Publishing as a guide for students. Copying or posting outside of FNAN441 is an infringement of copyright. Exhibit 5 - BabyCare Projected Income Statement ($000s) # Markets with Sales # New Markets Invested Gross Revenues % Growth Value Added Tax (VAT) Retail Offers Net Revenues Cost of Goods Sold Gross Profit SGA HR Expense Operating Exenses Product Development Depreciation Pretax Income Income Tax Net Income 2001 2 1 2,142 242 43 1,857 (522) 1,335 (1,292) (1,161) (502) (7) (361) (1,988) 2002 6 4 5,718 166.9% 567 113 5,038 (1,390) 3,648 (2,819) (1,248) (369) (119) (204) (1,111) (1,988) (1,111) 2003 13 7 13,572 137.4% 1,530 271 11,771 (2,825) 8,946 (6,003) (1,530) (520) (235) (294) 364 364 2004 24 11 33,787 148.9% 5,744 676 27,367 (6,568) 20,799 (13,234) (2,574) (729) (350) (365) 3,547 2005 36 12 59,311 75.5% 10,083 1,186 48,042 (11,050) 36,992 (24,496) (3,347) (947) (400) (411) 7,391 2006 48 12 82,501 39.1% 14,025 1,650 66,826 (15,370) 51,456 (32,882) (3,848) (1,089) (400) (501) 12,736 2007 60 12 107,912 30.8% 18,345 2,158 87,409 (20,104) 67,305 (42,830) (4,233) (1,898) (400) (637) 17,307 3,547 7,391 12,736 17,307 Source: BabyCare Exhibits are provided as part of "Growing Up in China: The Financing of Baby Care" HBS 9-204-029 Common Size (% of Gross Revenues) 0.00% 2001 2002 Gross Revenues 100.0% 100.0% VAT 11.3% 9.9% Retail Offers 2.0% 2.0% Net Revenues 86.7% 88.1% Cost of Goods Sold -24.4% -24.3% Gross Profit 62.3% 63.8% SGA -60.3% -49.3% HR Expense -54.2% -21.8% Operating Expenses -23.4% -6.5% Product Development -0.3% -2.1% Depreciation -16.9% -3.6% Pretax Income -92.8% -19.4% Income Tax Net Income -92.8% -19.4% 2003 100.0% 11.3% 2.0% 86.7% -20.8% 65.9% -44.2% -11.3% -3.8% -1.7% -2.2% 2.7% 2004 100.0% 17.0% 2.0% 81.0% -19.4% 61.6% -39.2% -7.6% -2.2% -1.0% -1.1% 10.5% 2005 100.0% 17.0% 2.0% 81.0% -18.6% 62.4% -41.3% -5.6% -1.6% -0.7% -0.7% 12.5% 2006 100.0% 17.0% 2.0% 81.0% -18.6% 62.4% -39.9% -4.7% -1.3% -0.5% -0.6% 15.4% 2007 100.0% 17.0% 2.0% 81.0% -18.6% 62.4% -39.7% -3.9% -1.8% -0.4% -0.6% 16.0% 2.7% 10.5% 12.5% 15.4% 16.0% Exhibits are provided as part of "Growing Up in China: The Financing of Baby Care" HBS 9-204-029 Exhibit 6 - BabyCare Projected Cash Flows Statement ($000s) Net Income Capital Expenditure Change in NWC Depreciation Change in Cash Cash on Hand Cash Investment Cumulative Cash 2001 (1,988) (140) (134) 361 (1,901) 3,000 1,099 2002 (1,111) (429) (1,021) 204 (2,357) 1,099 2003 364 (992) (240) 294 (574) (1,258) 2004 3,547 (770) (1,642) 365 1,500 (1,832) (1,258) (1,832) (332) 2005 7,391 (3,851) (1,120) 411 2,831 (332) 2006 12,736 (5,411) (2,722) 501 5,104 2,499 2007 17,307 (2,320) (2,304) 637 13,320 7,603 2,499 7,603 20,923 Source: BabyCare Exhibits are provided as part of "Growing Up in China: The Financing of Baby Care" HBS 9-204-029 Revenue Stream of a Cohort UNITS Consumed per Year Products DHA Ca+D Bainfant Liquid Children's Multi Colostrum Protein Drink Follow on Formula Year 1 2 3 0 0 2 2 0 Year 2 4 6 3 0 3 4 30 Year 3 6 4 3 0 2 4 40 Year 4 3 3 0 4 2 1 60 Year 5 2 2 0 4 1 1 80 Year 6 2 2 0 4 2 1 0 Year 7 2 2 0 4 3 1 0 REVENUE per Year Products DHA Ca+D Bainfant Liquid Children's Multi Colostrum Protein Drink Follow on Formula Annual Revenue per Cohort Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 28 $ 56 $ 84 $ 42 $ 28 $ 28 $ 28 48 96 64 48 32 32 32 54 54 52 52 52 52 36 54 36 36 18 36 54 56 112 112 28 28 28 28 90 120 180 240 $ 168 $ 462 $ 470 $ 386 $ 398 $ 176 $ 194 $ Prepared by: Member Price $ 14.00 $ 16.00 $ 18.00 $ 13.00 $ 18.00 $ 28.00 $ 3.00 Member Price $ 14.00 $ 16.00 $ 18.00 $ 13.00 $ 18.00 $ 28.00 $ 3.00 Prepared by: Data Available for BabyCare Subscriber Model 1st Year 2nd Year 3rd Year 4th Year 5th Year 6th Year 7th Year Attrition Average Spend Rate per Customer 60% $168 20% $462 10% $470 10% $386 10% $398 10% $176 10% $194 Prepared by: Subscriber Model for BabyCare 2001 2002 2003 2004 2005 2006 2nd Yr 1,000 462,000 3rd Yr 800 376,000 4th Yr 720 277,920 5th Yr 648 257,904 6th Yr 583 102,643 7th Yr 525 101,827 New customers in 2001 1st Yr # of customers 10,000 Revenues 1,680,000 2nd Yr 3rd Yr 4,000 3,200 1,848,000 1,504,000 4th Yr 2,880 1,111,680 5th Yr 2,592 1,031,616 6th Yr 2,333 410,573 7th Yr 2,100 407,307 New customers in 2002 # of customers Revenues 1st Yr 2nd Yr 20,798 8,319 3,494,000 3,843,400 3rd Yr 6,655 3,127,962 4th Yr 5,990 2,312,030 5th Yr 5,391 2,145,516 6th Yr 4,852 853,894 New customers in 2003 # of customers Revenues 1st Yr 47,302 7,946,680 2nd Yr 18,921 8,741,348 3rd Yr 15,137 7,114,171 4th Yr 13,623 5,258,432 5th Yr 12,261 4,879,716 1st Yr 122,310 20,548,106 2nd Yr 48,924 22,602,917 3rd Yr 39,139 18,395,447 4th Yr 35,225 13,596,975 1st Yr 155,641 26,147,624 2nd Yr 62,256 28,762,386 3rd Yr 49,805 23,408,349 1st Yr 163,255 27,426,820 2nd Yr 65,302 30,169,502 Existing customers in 2001 # of customers Revenues New customers in 2004 # of customers Revenues New customers in 2005 # of customers Revenues New customers in 2006 # of customers Revenues New customers in 2007 # of customers Revenues Total Number of Customers Total Revenues (000) Growth in customers Growth in sales 2007 1st Yr 205,930 34,596,258 11,000 2,142 25,598 5,718 59,541 13,572 151,414 33,787 228,866 59,311 286,522 82,501 375,474 107,912 132.71% 166.95% 132.60% 137.36% 154.30% 148.95% 51.15% 75.54% 25.19% 39.10% 31.05% 30.80% Prepared by: NPV of a New Subscriber Costs as % of Gross Revenue VAT Retail offers COGs 17.0% 2.0% 18.6% Probability Revenue per year Expected Revenue 1st yr 100.0% $168 $168.0 2nd yr 40.0% $462 $184.8 3rd yr 32.00% $470 $150.4 4th yr 28.8% $386 $111.2 5th yr 25.9% $398 $103.2 6th yr 23.3% $176 $41.1 7th yr 21.0% $194 $40.7 Cost per subscriber VAT Retail offers COGS ($28.56) ($3.36) ($31.25) ($31.42) ($3.70) ($34.37) ($25.57) ($3.01) ($27.97) ($18.90) ($2.22) ($20.68) ($17.54) ($2.06) ($19.19) ($6.98) ($0.82) ($7.64) ($6.92) ($0.81) ($7.58) $104.8 $115.3 $93.8 $69.4 $64.4 $25.6 $25.4 Earnings before Corp Discount rate NPV of a new subscriber 20% $296.75 Prepared by: BabyCare Total Enterprise Value Value of new subscriber (NPV) Discount rate Perpetuity growth rate Year Subscriber outcome $296.75 20% 3% (equal to inflation) 0 2002 Value of future subscribers Projected new subscribers Value of new subscriber 47,302 $296.75 14,036,663 Value of projected new subscribers PV of projected cash flows PV of terminal PV of new subscribers Adjusted PV at midpoint Value of existing subscribers Total subscribers (2002) Value per subscriber PV of existing subscriber Corporate costs: SGA HR Expense Operating Exenses Product Development Capital Expenditure Change in NWC Total corporate costs PV of corporate costs PV of terminal PV of total corporate costs Adjusted PV at midpoint Pre-tax Enterprise Value 1 2003 2 2004 122,310 $296.75 36,295,263 3 2005 155,641 $296.75 46,186,002 4 2006 163,255 $296.75 48,445,517 5 2007 205,930 $296.75 61,109,295 5 TV 370,250,435 111,551,729 148,795,346 260,347,074 285,195,931 25,598 $296.75 7,596,036 (2,819,000) (1,248,000) (369,000) (119,000) (429,000) (1,021,000) (6,003,000) (13,234,000) (24,496,000) (32,882,000) (42,830,000) (1,530,000) (2,574,000) (3,347,000) (3,848,000) (4,233,000) (520,000) (729,000) (947,000) (1,089,000) (1,898,000) (235,000) (350,000) (400,000) (400,000) (400,000) (992,000) (770,000) (3,851,000) (5,411,000) (2,320,000) (240,000) (1,642,000) (1,120,000) (2,722,000) (2,304,000) (6,005,000) (9,520,000) (19,299,000) (34,161,000) (46,352,000) (53,985,000) ############ (131,448,362) (222,606,632) (243,853,347) 48,938,619 48,938,619 2.0% 2.5% 3.0% 3.5% 4.0% 10% 95,105,379 99,358,290 ######### ######### ######### 15% 62,513,859 63,857,911 65,313,968 66,896,638 68,623,187 Prepared by: 20% 47,708,673 48,306,076 48,938,619 49,609,499 50,322,309 25% 39,110,825 39,426,047 39,755,598 40,100,476 40,461,777 30% 33,411,100 33,595,780 33,787,300 33,986,047 34,192,438 ##########
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Case analysis:
Growing up in China: The Financing of BabyCare Ltd.
Name
Affiliation
Date

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I.

Executive Summary
This company makes and offers healthful supplements, educational toys, beauty care

products, and mother and tyke related frill. Gives sustenance, child rearing and tyke
advancement preparing programs and related administrations. Baby care's financing have been
discovered mistakenly computed, this is the main problem that Some of the computation of this
industry has been experiencing some inappropriate in regards to their cash flow. The associations
of Chinese legal and traditions limitations and techniques for monetary speculators "transactions
assignment CFO discover tough preparations and building up a high-quality course of action
with these confinements. The case gives an assessment exercise and functions a part of the
difficult troubles soliciting for the investor may additionally request that requiring money
associated legal officer his general course of action and running capital wishes. This paper would
be developed a model that would help solve and fix the problem of the company regarding with
their cash flow calculation, as, like other industries, this company needs to be well-organized and
appropriately compute their cash flow fairly and in accordance to the data that they have been
recorded. The company should and must implement an effective financial plan for their
distributors and the collaboration of investors plan towards the company of Baby Care. The
subscriber model is a good assessment to compute their cash flow accordingly. Therefore, in this
case, we are going to use this model and will properly indicate those changes of computation that
the company must have to obtain in order to fix those assumptions and even risk if any that the
company has been experiencing.
II.

A statement of the problem(s)

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The firm's decision regarding their financing feat...


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