**Market Review:**

Considering operations through which KTM conducts its business is also significant to keep in mind as around 80 % of the motorcycles are sold through sales subsidiaries each having its own mechanism approved by the management, the remaining 20 % of sale is done through the general importers. Talking about product line of the company, 80 % of the revenues are generated from European countries.

Furthermore in this report we will develop a financial plan and structure for the company to pursue its acquisition and expansion plans in the best possible and profitable manner. More over strategies for value addition prior and after investment made will also be discussed.

**Analysis: **

Enterprise Value: Value of the company is basically the net worth of the company in market keeping all the considerations of future upcoming as well that can affect the firm. A general and in formal way would be accumulating the net equity and a total of liabilities. But when such complex decision are to be taken this information is not enough, so another method would be to compute the enterprise value is by using the strategy that subtracts cash and cash equivalents, preferred shares minority interests and debts from market capitalization. But in the case provided valuations of the firm is done using Free Cash Flow to Firm (FCFF) method, thus it will be more appropriate and in line with the industry norms to value the firm using free cash flow method.

**Free cash flow to the firm / Enterprise Value:**

Firstly we have projected the Earnings before interest and tax for the upcoming 5 years, considering the growth rate to be 6%. Moving on wards the discount rate used for the discounting of cash flows to net present value is calculated to be 6.18%.

As the complete data is not provided in the case to proceed further we need to take assumptions in some of the calculations as well.

- Interest to be charged or cost of debt is to be taken as 4.25 % that is the bank lending rate as well.
- Industrial beta have been used for the calculation of the beta of KTM
- Capital asset pricing model (CAPM) is used for the calculation of discount rate for the cost of equity using only the book value as market value is not present, on which the future cash flows are discounted.
- In the case of capital expenditures of the firm we are assuming organization has adjusted the figure in the financial statements already, so we are not taking any Capital expenditure figure separately thus leading towards the unchanged cash flows.
- The beta derived is from POLARIS organization as it is involved in the business of primarily selling motor bikes just like KTM, the beta of Polaris is taken, de-geared it into accordance with the assents of the company and it is de-geared again to reach the beta for KTM which appear to be 4.97.
- According to the requirement by organization the growth rate for terminal value is created at 1%.

Total value of the enterprise that have been calculated using the free cash flow to the firm is computed to be 1.97 billion Euros. The 20% upside in the value of firm would be 2.364 billion euros. The 20% downside will take the value towards downward trend and appears to be 1.576 billion euros.

Most important thing here is the computation of the value of 49% stake of equity of venture cab a list is 965 million Euros.

**Multiple Analysis:**

Another valuation that can be kept in consideration is the multiple analysis. We can reach there by dividing Enterprise Value with the earning before interest and tax. Another way for valuation of the enterprise is the derivation of value from long term debts and value of equity, and subtracting cash and cash equivalents.

Multiples Analysis provides the enterprise value of 121 Million Euros and the answer provided by multiple analysis is 3.13 times. This method is not widely used and practiced in valuation of a business or firm yet some of the shares holders still used it to reach the minimum possible value of the firm. For the remaining part of our project we will be using free cash flow method in moving towards the outcome of our project.

**Investment Hypothesis:**

**Funding required:**

The company requires the heavy sum of amount for it’s to be capital expenditure for buying the minority stake in the firm, which is 49 % shares from the B C capitalist. The amount mentioned in the case required for the buying of shares from BC is ranging in between 80 million euros to 125 million Euros. This is supposed to be very low as compared to the amount calculated using the free cash flow method. We first calculated the free cash flow to firm for the valuation of the complete firm and it was 1.97 billion euros and then from it we did calculated the amount for 49 % of the share that makes up to 965 million Euros. Another amount of 145 million euros will be required by the firm in the head of capital expenditures for the upcoming 5 years.

Thus in this scenario the total sum of amount required by KTN for acquisition.

**Debt level:**

The attached excel file contains the calculation of the firm’s debt value. Which appears to be 130.5 million euro in total. Where as in contrast the value of equity in the firm is 16.2 million euros. The above mentioned statements of debt and equity clearly indicate that the firm is highly under the burden of debt, it is paying huge amounts in interest and along with interest with the time firm has to pay the principle amount also.

**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……..

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