Hearing: Internal Rate of Return and Terminal Value Essay

835 Words Mar 3rd, 2014 4 Pages
Harmonic Hearing

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,
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After year 5, they cash flow will pick up where it left off and increase even higher until they sell the company. The IRR will be around 429%. And the value created from the small investment will be just under $45 million in only a 7 year period.

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
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