Harmonic Hearing Co.|
Burns and Irvine need $28.3 million to purchase Harmonic from its founder and complete and launch the new hearing aid. They have to determine the costs and benefits of different financing alternatives and, finally, select the optimal financing package in terms of expense, expected return to investment and financial flexibility. Analytical approach
Unlevered free cash flows to the firm
1. The strengths and draws of debt financing
Burns and Irvine can maintain 100% ownership of this company using debt financing. Their obligations are payment of principal and interests and they can run business without considering others’ suggestions, that is, they own much more freedom of operations. Secondly, debt financing can receive the advantage of tax deduction. But the drawbacks of debt financing are obvious. The owner should pay the principal and interests periodically and if the business went down, the company will be faced with problem of finance. At the same time, even if the interests are deductible when calculating the taxes, the rate is still high, and as a result, come out a large amount of costs. In this case, the owner should pay tremendous amount of lease, rent, interests and principal, making the ROI is much lower than that of equity financing. In order to financing the remaining funds except for loans, the company used the excess cash. This behavior is risky when the sales decrease and costs increase, making the company involve into liquidity crisis. More badly, the credit rating and company image will decrease in some more troublesome condition. 2. The strengths and draws of equity financing
Equity financing seems more cost-effective than debt financing in this case with a high ROI and positive NPV. And if the company’s business went down, the investors do not need to pay the money back. But...