Harmonic Hearing Case Study
The value created under the debt scenario Is 37,089,386.
37. The value created under the equity scenario Is $53,099,690.74.
Please refer to my calculations In the sheet named “Question #4”. The rate of return for the debt scenario Is 1756%.
The rate of return for the equity scenario Is 290%.
For the all debt capital structure, one advantage is that Burns and Irvine will be addle to retain 1 ownership AT Harmonic. However, Telex payments sun as rent, lease, and interest expenses are large, continuous obligations of the company.
If restated cash flows fall short of expectations, the company would fall into financial distress.
Another disadvantage is that there will not be enough funds to immediately manufacture the new hearing aids which will delay potential sales. For the all equity capital structure, one disadvantage is that Burns and Ravine’s ownership stake will be significantly reduced. However, with the extra equity capital from the investment, the company will be able to invest in the working capital and equipment required for internal manufacture of the new device.
In addition, the new hearing aids will generate revenue sooner and at higher gross margins than in the all debt scenario. I would recommend Burns and Irvine accept Comet’s Capital’s offer and finance the company through private equity funds. There seems to be an error in my calculations of the sale price to repurchase the real estate from Frank Thomas.
The rate of return for equity should be higher than the rate of return for debt. There is too much risk of potential bankruptcy with debt financing.
