Hearing: Internal Rate of Return and Terminal Value Essay
1) For both financing alternative, develop a model that shows forecasted revenues, expenses, profits, and free cash flows generated by Harmonic in years one through seven.
Model shown in chart below.
• What is the terminal value of the company under each scenario?
As you can see in the graph below, the terminal value for the company if it takes the equity route is about $106M, where if it takes the debt route its terminal value will be about $45M.
• What cash payments will be made by the company at the end of year seven?
As you can see in the graph below, the only cash outflows from the company in year 7 will come from debt financing, with about an $11M outflow from buying back the building from Frank Thomas, …show more content…
5) What are the positives and negatives of each proposal? Which financing alternative would you recommend and why?
Equity Proposal
• Advantages
i. Higher IRR ii. Can immediately complete launch of new hearing aid
Will stay ahead of competition iii. Will reduce the risk of the transaction iv. Will reduce cost of goods sold on new goods from purchasing new equipment
v. Will increase depreciation expense, lowering tax expenses vi. Will have no rent, interest, or lease expenses vii. If company goes down, will not have to pay any additional money back
• Disadvantages
i. Less ownership in company ii. Will have to invest more capital in the company than the debt proposal
Debt Proposal
• Advantages
i. Maintain 100% ownership of company
Will not have to follow anyone else’s plans for the business and can completely control the direction the company moves in ii. More tax deductions
• Disadvantages
i. Lower IRR ii. Will have a delay in bringing new hearing aid to the market
Will allow competition to catch up to them faster iii. Will have to worry about having enough cash flow to pay for several different interest payments and

Rate Of Return On Equity
1612 Words  7 PagesSecond Proposition: Rate of return on equity: The second proposition of Modigliani and Miller it states that as the financial risk rise the higher the shareholders’ rate of return. Financial leverage increases the risk of a shareholder since it increases the variability of the EPS and the ROE, this behaviour has got two directly proportion effects, Increase in the shareholders’ return however, it also increases the shareholders’ financial risk. As per this effect the shareholders’ are expected to…

Calculating Terminal Value
1047 Words  5 PagesCalculate the Terminal Value Having estimated the free cash flow produced over the forecast period, we need to come up with a reasonable idea of the value of the company 's cash flows after that period  when the company has settled into middleage and maturity. Remember, if we didn 't include the value of longterm future cash flows, we would have to assume that the company stopped operating at the end of the fiveyear projection period. The trouble is that it gets more difficult to forecast…

The Rate Of Return On A Stock
2942 Words  12 PagesAccording to the records from Bloomberg, it is common that the rate of return on a stock to vary over the course of time. Therefore, we normally prefer to base on average rate of return to calculate the expected return of these stocks. Also, standard deviation is widely used in evaluating the investment risk of assets. Those stocks that have higher standard deviations are more likely to be exposed to higher risk, vice versa. Table 1.1 Disney Visa Priceline Mean 2.29% 2.63% 5.37% Standard Deviations…

Problems Between of Internal Rate of Return and Modified Internal Rate of Return Methods
2580 Words  10 Pagesnot be utilized is when one is attempting to make decisions concerning investment over individual projects. Internal Rate of Return IRR is considered to be an important method for capital budgeting proposals. The Internal Rate of Return is the rate, where present value of cash inflows and outflows comes out to be equal or the rate at which NPV from the project comes equal to zero. At this rate, there are no benefits or losses for the Organization. If the Organization earns an IRR on the investment…

Introducing The Internal Rate Of Return
1263 Words  6 PagesINTRODUCING THE INTERNAL RATE OF RETURN (IRR) The Internal Rate of Return (IRR) is that discount rate providing a net value of zero for a future series of cash flows. The IRR and Net Present Value (NPV) are used to decide between investments to select what investment should provide the most returns. DIFFERENCE BETWEEN THE NPV AND IRR The main difference is that the Net Present Value or Net Present Value (NPV) is used as actual amounts, while the IRR is the interest yield as a percentage expected…

The Rate Of Return From Investing
2553 Words  11 PagesWhat methods have been used by researchers to examine the rate of return from investing in the visual art market? Sub Questions What are the limitations of the RepeatSales Model (RSM) and the Hedonic Pricing Model (HPM)? What could be done further for future research? Abstract One of the most important aspects of the art market is the uniqueness of the art works. Lately it has been recognized that the most popular methods of creating art price indexes and examining the art market, rely on biased…

Net present value (NPV), payback period (PBP) and internal rate of return (IRR) approaches for a project evaluation
2931 Words  12 PagesAbstract This essay will discuss the net present value (NPV), payback period (PBP) and internal rate of return (IRR) approaches for a project evaluation. It is often said that NPV is the best approach investment appraisal, which I why I will compare the strengths and weaknesses of NPV as well as the two others to se if the statement is actually true. Introduction To start of, the essay will attempt to explain the theoretical rationale of the net present value approach to investment appraisal as well as…

Internal Rate of Return
1000 Words  4 PagesInternal Rate of Return Meaning of Capital Budgeting Capital budgeting can be defined as the process of analyzing, evaluating, and deciding whether resources should be allocated to a project or not. Capital budgeting addresses the issue of strategic longterm investment decisions. Process of capital budgeting ensure optimal allocation of resources and helps management work towards the goal of shareholder wealth maximization. Why Capital Budgeting is so Important? Involve…

Rate of Return
1734 Words  7 Pagesch10 Student: ___________________________________________________________________________ 1. The capital gains yield plus the dividend yield on a security is called the: A. geometric return. B. average period return. C. current yield. D. total return. 2. The expected return on a security in the market context is: A. a negative function of execs security risk. B. a positive function of the beta. C. a negative function of the beta. D. a positive function of the excess security…

Compare and contrast the internal rate of return (IRR) and the net present value (NPV) criteria for evaluating investment proposals.
2568 Words  11 PagesThe internal rate of return (IRR) and the net present value (NPV) techniques are 2 investment decision tools that satisfy the 2 major criteria for the correct evaluation of capital projects. This criterion is that the techniques should incorporate the use of cash flows and the use of the time value of money. This makes them viable techniques for evaluating investment proposals. The Net Present Value is one of the techniques that are used by firms when evaluating which investment proposals to take…
More about Hearing: Internal Rate of Return and Terminal Value Essay

Rate Of Return On Equity
1612 Words  7 Pages 
Calculating Terminal Value
1047 Words  5 Pages 
The Rate Of Return On A Stock
2942 Words  12 Pages 
Problems Between of Internal Rate of Return and Modified Internal Rate of Return Methods
2580 Words  10 Pages 
Introducing The Internal Rate Of Return
1263 Words  6 Pages 
The Rate Of Return From Investing
2553 Words  11 Pages 
Net present value (NPV), payback period (PBP) and internal rate of return (IRR) approaches for a project evaluation
2931 Words  12 Pages 
Internal Rate of Return
1000 Words  4 Pages 
Rate of Return
1734 Words  7 Pages 
Compare and contrast the internal rate of return (IRR) and the net present value (NPV) criteria for evaluating investment proposals.
2568 Words  11 Pages