A pre-downturn comparison on capital structure strategy, from the perspective of a Swedish retailer
Capital structure decisions and impacts have always been on top of every CFO’s and shareholder’s mind. Many theories have been presented and so far, no ap- parent consensus regarding how, why or when financing should be done in order to maximize firm value, exists.
This thesis relates the most prominent theories to KIN Group, one of Swedens major retailers with the aim to uncover the underlying factors for its financing decisions. The study gathers data from 2007 in order to capture the complexity of managing, not only a rapid-growing private company, but also while combat- ing challenges of the recent financial downturn in 2008.
Semi-structured interviews are conducted with the CFO and the company’s two shareholders and a significant quantity of raw financial data is analyzed. The findings suggest that the most applicable forms of framework in the KIN Group case are the market timing theory due to information asymmetry and hence, the willingness to finance ownership based on market trends. As a private company, this becomes a little bit more difficult since pricing of shares becomes a complex process. In this context, shareholder and investor perception of future cash flows differed, and hence the given offer was considered underpriced. Second, the firm demonstrated the principle of least effort approach, which is a pragmatic frame- work for financing decisions. This had great impact on KIN Group’s pursuit for capital, and as the debt-levels already was burdened, equity was the only feasible choice. Third, the findings show that no other of the academic theories covered in this thesis is applied within KIN Group in their obtaining of capital structure.
Finally, the findings covered in this thesis suggest that the firm value creation was to a high degree dependent on the leverage undertaken by KIN Group. By implementing WACC calculations, we can conclude that the firm value had increased to an approximate level of MSEK 686.5 by the end of 2010. By conducting a what-if analysis, assuming no leverage and 15% annual growth, the firm value would instead have reached a level of approximate MSEK 167.
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