Business Case Studies & Business Publications

Kelly Solar

Bodily, Samuel E.,...

Case

Kelly Solar

Bodily, Samuel E.; Lipson, Marc L.; Lichtendahl, Kenneth C. Jr.

F-1614 | Published January 29, 2010 | 3 Pages Case

Collection: Darden School of Business

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Jessica Kelly has spent two years and all her start-up funds to develop a new product through her company, Kelly Solar, only to find that a competing product may render her efforts worthless. To improve her chances of success, she needs to raise new funds to make improvements on the product. Complicating matters, Kelly Solar has outstanding debt with claims of sufficient magnitude that no new investment would make economic sense unless the existing debt holder, Scott Barkley, were to renegotiate his claim. While the case facts are quite simple, the analysis of this classic debt overhang scenario provides a rich context in which to consider the agency costs of debt and to explore concepts in negotiation. The case can be especially compelling if students are paired in advance (one playing Kelly and another playing Barkley) and asked to negotiate the new investment. The case is appropriate for both undergraduate and graduate classes. The case makes little use of financial tools—the analysis is based on probabilities and payoffs. The context is intentionally simplified so that quantitative analysis is easily learned, and the instructor can focus on conceptual issues.

This case can be used to pursue the following teaching objectives: (1) Illustrate how the existence of debt claims would lead to situations in which a company does not take value-increasing projects. Explore how such lost opportunities and the fees associated with any renegotiation of claims constitute a cost of debt financing. (2) Explain central concepts in negotiation such as the best alternative to negotiated agreement (BATNA) and the zone of potential agreement (ZOPA). (3) Explore the pricing of contingent claims and illustrate how changes in the riskiness of assets affects those claims. (4) Provide experience negotiating a deal in which the parties can create value and share that value in some way, or possibly, fail to create value.