To value KTM Corporation, we utilized two approaches: Discounted Cash Flow Analysis and Relative Valuation Analysis. In order to value KTM using the Discounted Cash Flow technique, we first had to look at a lot of their numbers located in its 10-K. These numbers included metrics such as revenue, number of company-owned/licensed stores, and subsequent sales from both types. From there, we were able to project how these would perform 5 years in the future, as well as key metrics like adjusted operating income, net capital expenditure and change in working capital. Once we had best predicted what will happen to KTM, we discounted its free cash flows from each year, in order to find the total enterprise value of the company. This number gives us the best estimate as to how KTM should be valued when looking internally at their fiscal values.
Hypothesis
The Relative Valuation Analysis method is a process in which we found companies similar to KTM in terms of size and expected growth. In our analysis, we determined five companies deemed most comparable to KTM according to these metrics, provided an effective valuation for them, then calculated multiples that gave us a representation of these valuations in terms of the company’s yearly sales and operating income (EBITDA). The median for both of these multiples were used to calculate two possible valuations for KTM, with considerations to minor adjustments that needed to be made to take into account the differences between the comparable companies and KTM.
After finding three valuations for KTM, one through the DCF method and two through the Relative Valuation method, we utilized all three to arrive at one valuation for KTM. To do so, we applied weighted assumptions to each method based on which method we believed provided a more accurate valuation for KTM. Since we believe the DCF valuation delivers the most accurate estimate to value a company, we applied a 50% weight to this value and 25%
to the valuations provided by the Relative Valuation analysis in order to arrive at our final valuation of KTM.
A firm’s capital structure is how a firm finances its operations and growth. In order to calculate KTM’ capital structure we looked mainly at its 10-K forms and the Federal Reserve Economic Data (FRED) for government information. Using the information available on the 10-K we were able to calculate the value of debt and equity, and their weighted adjustment percentages all of which will be discussed in more detail in the following paragraphs.
When finding KTM’ cash flow for 2007, we had to go through and calculate other metrics in order to best estimate this number. This meant finding the individual values for its cash earnings, investments, and change in working capital (WC). Finding these numbers allowed us to find its total free cash flow for the year. (All numbers in millions)
Deal Structure
To find the cash earnings for KTM, we first took their Earnings Before Interest and Taxes (EBIT), which we had found off of its 10-K, added back their financing charges as well as investment charges. To calculate its financing charges, we first took $5,669.5, which is KTM’ operating lease obligations and multiplied it by 3.24%, which is its cost of debt as a percentage, and we had found that previously in our assignment. For the investment charges, we were given the number to work with. Once we added all the numbers up, this gave us our Adjusted EBIT, after which we just subtracted its taxes, and that final value gave us KTM’ After Tax Cash Earnings, equalling $2,994.42.
| EBIT | $3,903 |
| Add financing charge | $183.69 |
| Add investment charge | $51.4 |
| Minus Taxes | -$1,143.7 |
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In order to find out the total investments for KTM, we had to normalize the values for its capital expenditure, depreciation, and acquisitions. We normalized these numbers by taking their values for these categories of the past 5 years and taking them as a percentage of that year’s total revenue. Once we got all these values, we subtracted depreciation from capital expenditure, and when we had that number, we added up that, the normalized acquisitions, the change in the value of the lease (yr 2007-yr2006), and the investment charge in order to find our Net Capital Expenditure.
| Capital Expenditure | $1,248.47 |
| Depreciation | $877.33 |
| (Capital Expenditure-Depreciation) | $371.13 |
| Acquisitions | $269.43 |
| Change in Value of Lease | $568.81 |
| Add Back Any Investment Charge | $51.43 |
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To calculate the change in WC that KTM had, we had to look up the 5 year values of its inventories, accounts receivable and accounts payable. After adding all these numbers up for each year, we found the change year over year by seeing the difference of the new year subtracted by the value of the previous. After that, we took the total revenue for each of those years and found what percent of revenue the change in WC was. We then averaged those numbers and multiplied it by the revenue for 2007 to find our normalized change in WC, which worked out to be $236.44. (See Appendix E for full calculation)
III. Base Year Free Cash Flow Calculation
After finally finding all of these values, they all came together by taking our Adjusted EBIT value, and subtracting Investments and then Change in WC, which gave us the free cash flow for KTM. (For final calculations and comparable ratios.
| Adjusted EBIT | $2,994.42 |
| Minus Investments | $1,260.80 |
| Minus Working Capital | $236.44 |
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When calculating the metrics for KTM’ company-owned and licensed stores, we first created a table for the last 5 years running of the company’s revenue, EPS, and total number of stores, which we broke down further into company-owned or licensed.
| 2010 | 2003 | 2004 | 2005 | 2006 | 2007 | |
| Revenue
Company- Owned | $10,707.4 | $11,700.4 | $13,299.5 | $14,866.8 | $16,447.8 | $19,162.7 |
| 8,833 | 9,031 | 9,405 | 10,194 | 10,713 | 12,235 | |
| Licensed | 8,025 | 7,972 | 8,661 | 9,573 | 10,653 | 10,808 |
After collecting all of the data from the previous 10-Ks, we then found the growth of each value by looking at the current year’s numbers compared to the previous year. These were expressed as percentages, and we proceeded to compute the average percent change for the total number of stores, both company-owned and licensed individually, and finally, the same-store sales that were also taken from each year’s 10-K.
| Growth % | 2003 | 2004 | 2005 | 2006 | 2007 | Average |
| Revenue
Company- Owned | 9.27% | 13.67% | 11.78% | 10.63% | 16.51% | |
| 2.24% | 4.14% | 8.39% | 5.09% | 14.21% | 6.81% | |
| Licensed | -0.66% | 8.64% | 10.53% | 11.28% | 1.45% | 6.25% |
III. Store Revenue Projections/CF Projections
When finding the numbers to see revenue per store, and project the number of new stores, projected revenue and expected revenue growth, we further separated the company-operated and licensed stores by finding these projections separately. To find revenue per store, we took the total revenue that came from each type of store, and divided by the number of old stores.
For the projections, we first looked at how many new stores of each kind would be opened in the new year, which we found by multiplying the number of old stores by the average new stores growth we found in the Growth Metrics. Next, we projected revenue for both types of stores by taking last year’s revenue per store and multiplied it by 1 plus the same store sales growth as well as the number of old stores when added to the number of new stores, divided by 2. We did this to factor in the revenue added from existing stores as well as the potential new stores to be added this year, and divided by 2 to reflect that stores open up different times of the year and wanted to average out those potential sales. Lastly, we projected expected revenue growth for both kinds of stores by taking our projected revenue, dividing by the current year’s revenue and subtracting one, to show what total growth will be.
| (in millions) | Revenue/Store | # of New Stores | Projected Revenue | Expected Revenue Growth |
| Company- Owned Licensed | $1.24 | 834 | $16,815 | 10.65% |
| $0.17 | 675 | $2,054 | 10.34% |
- Exit Options
To project the future free cash flows for 5 years into the future, we took the revenue, adjusted operating income, net capital expenditure, and change in WC to look at. First, to project revenue, we took the sales growth rate for the first two years, and after that, decreased the rate at which revenue increased by taking the sales growth rate, subtracting the economy rate, and dividing by 3, the number of years left to project. We did this to reflect the way in which companies tend to hover near how the economy performs in the future.
After calculating all these values until 2021, we were able to find KTM’ free cash flow for each year, by taking the adjusted operating income and subtracting by both net capital expenditure and change in WC. We did this for each year as well as finding the present value of each of the values by dividing by 1 plus KTM’ WACC, which was calculated earlier in the assignment, taken to the power of whatever year in the future it was. We found KTM’ terminal value by taking the FCF in 2021 and dividing by the WACC minus the perpetual growth rate, which was taken from an online source. The present value of the terminal value was also found using the same method as before. Once this was done, the sum of the present values from 2004 forward as well as the present value of our terminal value is what is known as the enterprise value of KTM when looking 5 years into the future. (See Appendix G for full projections)
| 2004 | 2005 | 2006 | 2007 | Terminal | Enterprise | |
| FCF PV | $710.8 | $1,143.1 | $1,612.3 | $2,094.8 | $70,482.3 | |
| $663.7 | $996.6 | $1,312.6 | $1,592.5 | $50,030.6 | $56,144.5 |
The second method we used to determine the value of KTM was through a Relative Valuation analysis. During this process, we found five companies who were similar to KTM based on growth and sales. Based off the comparable companies, we calculated effective multiples and adjustments to determine KTM’ relative enterprise value through its most recent yearly revenue and EBITDA. EBITDA is a company’s operating profit before interest expenses, taxes, depreciation, and amortization are taken out.
After calculating the enterprise values for each comparable company, we found two multiples based on Enterprise Value-to-Sales and Enterprise Value-to-EBITDA. The sales and EBITDA data were found by adding up the last four quarters of revenues and EBITDA from each company’s most recent 10Q. We took the median of both multiples to use in our relative valuation, as shown below:
| Valuation Multiples Median based off Comparables | |
| Enterprise Value / Sales | 2.7 |
| Enterprise Value / EBITDA | 17.2 |
Appendix H explains how we arrived at these two multiples based off the five comparable companies.
Since the five companies do not exactly match KTM in terms of enterprise value, sales, and EBITDA, we calculated an estimated adjustment percentage to account for the dissimilarities. To calculate the adjustment percentage, we compared KTM’ Revenues, expected one-year earnings growth (from nasdaq.com), and operating margins (EBITDA/Revenue) to the medians of the comparable companies. Large variances were given a ten percent adjustment, while smaller variances were given an additional 5 percent adjustment.
Overall Relative Valuation
Once the multiples and adjustments were calculated, we could find two estimates for Starbuck’s relative enterprise value based on its revenues and EBITDA:
Enterprise Value (EV) based off Revenue
| KTM Revenue EV based off EV after (thousands) 2.7x Multiple 20% Adjustment | ||
| $20,519.5 | $55,959.06 | $67,150.87 |
Enterprise Value (EV) based off EBITDA
| KTM EBITDA EV based off EV after (thousands) 17.2x Multiple 20% Adjustment | ||
| $3,913.90 | $67,380.66 | $80,856.79 |
KTM Enterprise Value through Relative Valuation Method
| Relative Enterprise Value (Revenue)
Relative Enterprise Value (EBITDA) | $67,150.87 |
| $80,856.79 |
Once the three calculations for KTM Inc.’s total value were computed, we decided to incorporate all three by finding a weighted enterprise value for KTM. The two values found through the relative valuation method were each given a 25% weight in the overall calculation. The value found through the discounted cash flow method was given a 50% weight since we believe this is a more accurate way of figuring out a company’s true value. After applying the weighted percentages to each of the three values, we arrived at an overall valuation for KTM Inc. to be $65.07 billion.
| Method Calculated Valuation Weighted Percentage (thousands) | ||
| DCF Valuation | $56,144.47 | 25% |
| Relative Valuation (Sales) | $67,150.87 | 25% |
| Relative Valuation (EBITDA) | $80,856.79 | 50% |
| OVERALL VALUATION | $65,074.15 | 100% |
Value of Equity
To find KTM’ equity value, we simply added the existing cash balance to the $65.07 billion valuation, then subtracted the value of debt amount calculated previously in the report. The cash balance was $2.14 billion while the value of debt was $7.56 billion.
| KTM’ Valuation Cash Value of Debt Value of Equity | |||
| $65,074.15 | $2,141.80 | $7,557.75 | $59,658 |
Therefore, KTM’ value of equity is $59.66 billion.
Overall Valuation
After analyzing KTM Inc. through the DCF and Relative Valuation Method, and applying stated assumptions/adjustments, we have arrived at the following calculations for KTM’ Enterprise Value, Value of Debt, and Value of Equity:
KTM Inc. Valuation (in thousands)
| Enterprise Value Value of Debt Value of Equity | $65,074 |
| $7,558 | |
| $59,658 |
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