Essay about The Purchase of Harmonic Hearing Co.

2120 Words Mar 2nd, 2013 9 Pages
Harmonic Hearing Co. Case

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Under the two circumstances presented, I recommend that Harriet Burns and Richard Irvine should finance the purchase of Harmonic Hearing Co. through the deal proposed by the private equity firm, Comet Capital. This proposal best aligns with Burns and Irvine’s goal to select an option that offers the “best combination of cost, expected return of their ownership interest and financial flexibility.” To evaluate the two alternatives, a comparison based on IRR was assessed. Harrison Price’s proposal, which relies almost entirely on debt financing, offers an IRR of 215.5% (Appendix A). On the other hand, Joe Fowler’s proposal, which consists of equity financing, offers an IRR of
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If R&D were to grow 15% annually instead of staying constant at $600,000 after year one, the terminal value would drop drastically to $14.5 million from the original prediction of $45.3 million (a drop of 68%). In addition, Burns and Irvine would yield a measly IRR of 22.6% in comparison to the 215.5% originally projected (Appendix D). The global industry in hearing aids is dominated by six multinational giants and many small companies like Harmonic are still allowed to operate successfully in the industry. In order to flush out these smaller companies, the six giant companies may decide in the future to cut costs and offer cheaper alternatives which may result in decreased sales for Harmonic. If existing sales were to then fall by 10% annually, Burns and Irvine would be in a lot of trouble. The cash flow would become negative at year five and Burns and Irvine would either be unable to purchase their equipment or would not be able to make sufficient payments on their loans (Appendix E). In order to fulfill obligatory payments, they would be forced to postpone purchasing equipment, cut costs in other areas, take a reduction in salary, etc. None of these options would be advantageous to their profitability or happiness. Another scenario that could occur is that the delay of the launch of the new hearing aid

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