Ktm-Venture Capitalist Exit Harvard Case Solution & Analysis

Options in financing:

When looking towards the debt to equity ratio it appears to be 7.87(possibility of change remains because book value of equity is taken instead of market value due to insufficient data) from the books which is visibly indicating the alarming amount of debt. Calculations also justify the argument of having substantiate amount of debt which appears to be more or less 90 % and remaining 10 % is of equity. Along with the current level of debt if the firm wants to finance it from debt than the option available for the firm is to take the one hundred fifty million euros debt upon 4.5% interest rate. Another option along with debt is to issue the bonds for 7 % interest annually.

Cost of Debt:

With the debt cost also comes and is needed to be paid on the time. As the firm is already highly leveraged it cannot be the wise decision to take the company towards bonds. Rather company should prefer first option because in availing the first option the interest payments would be of 33.7 million euros where as in the second option of issuing bonds the total interest payment would be 52.5 million euros. (Calculations available in attached excel file). Analysing the situation in further depth tells us that first option would take the firm to 13% debt in comparison to the option two of bond financing that will take the firm to 20% debt, keeping this huge difference in sight and the previous financials of the firm it is highly recommended for the firm to go for the loan on 4.5% interest payable.

Initial Public Offerings (IPO):

Along with the other major decisions undergoing, the senior management of the firm is thinking to public the firm Austrian market. Keeping in view all the code of conducts and rules predetermined by the concerned Austrian regulatory authorities the firm should proceed further in initial public offering in Austrian market. The rationale behind this recommendation is the company is already very high on debt and financing through IPO will enable the firm to balance out the disturbed ratio of debt to equity. This can also work for the company in favour because mostly the companies which are trading in stocks and are present on more than 1 exchange are considered as big firms and reliable ones.

Sensitivity of Issue:

Firm requires 150 million euros additional debt. And its future cash flows are discounted on present values. Sensitivity tab explains the percentage of the cash flow that will be required for the interest payment in each of the option.

In Miliion

2003 2004 2005 2006 2007 Total
Present Values 27.61 33.06 33.57 51.02 57.84  
Additional Debt 150
4.5% Interest at Austrian Market 6.75 6.75 6.75 6.75 6.75 33.75
7% Interest at Euro Market 10.5 10.5 10.5 10.5 10.5 52.5
Austrian Market 24.45% 20.42% 20.10% 13.23% 11.67%  
Euro Market 38.03% 31.76% 31.27% 20.58% 18.15%  

Above calculations of potential interest payments indicates the sensitivity and their impact upon the free cash flows of the firm. If we look at 2003 for both Austrian market and Euro market case the % of being leveraged is highest. Afterwards with the time it starts to diminish, as the firm is already 90 % leveraged availing any of these options will increase the 90 % to 95 % making it nearly impossible for the firm to seek any kind of debt in future until a major sum from the previous one is paid off.

Deal Structure:

Among many other options in this scenario for the KTM the smartest option would be to opt for a mix of both equity and debt, thus dependency on any specific would be diminished. For instance the firm requires computed capital of 1110 million euros in total, for the future prospects of acquiring the whole firm. For this the firm should get debt at 4.5% amounting 150 million euros. Which will leave behind 960 million euros, firm should raise the remaining amount from Initial public offerings. For issuing the equities stock price can be determined from POLARIS firm, which also been considered in previous calculations of WACC. After conversion from $ the appropriate price in euro gives the value of 22 Euros. Thus for IPO,

960,000,000 Euros / 22 Euros (Price per share)

= 43.6 million shares.

43.6 million Shares needed to be float on the above price in order to raise the needed capital, rationale behind this decision is it will bring down the overall debt % in the capital. Moreover it will counter the effects of debt on financial statements. Also it will raise the firm’s capacity to go for debt in near future. Last but not the least the dependency of firm solely on debt will be countered in the balance way.

Exit Options:

Among many of the applicable strategies most relevant and suitable strategies in this scenario will be, Dividend policy, Buyback of shares, IPOs, Fund-raising, Merger and Acquisition, Leveraged recapitalization.

Value creation strategies could vary from firm to firm as well as the nature of business firm is involved in. To reach the value creation strategy all accounts should be considered important and carefully analysing the situation is needed. As the firm KTM is considering to buy back the 49% stake in the company from the venture capitalist firm fund raising in needed, but to reach that position firm has many ways to go through. It should choose the IPO option as details were mentioned earlier, coming back to the value creation from IPO’s after the shares are issued and start trading upon the exchange, and announcement for the dividend even relatively smaller dividend pay-out can increase the value exponentially. As numerous investors do prefer the dividend paying stocks for long run. Leveraged recapitalization is not recommended at all, because the firm is already in huge debt around 90 %. At this vary point of time merger and acquisition is considerably not going to help KTM in any manner, as KTM needs to finish it’s already started process of buying back the stake from B C capital. The Existing Multiple for the firm is at 3.13 times, when the equity house Chooses to get out from the business. Company can also take some steps to increase its relevant multiples, some of which are listed below,

  • Increase EBITDA
  • Improve the flow of cash
  • Diversify the customer range
  • Improve financial insights
  • Financial forecasting not only on assumptions but on in-depth consumer research......


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