Hearing: Internal Rate of Return and Terminal Value
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, as well as about a $6M outflow from paying back the 9% interest loan.
2) At what price must Harmonic repurchase the building from Frank Thomas to produce his required 15% after-tax return?
In order for Frank Thomas to earn his 15% after tax return, Harmonic must buyback the building for just over $11M. The calculations can be seen in the chart below.
3) What proportion of the terminal value must be distributed to Comet Capital to produce its required 25% before-tax rate of return?
In order for Comet Capital to produce its 25% before tax return, they must receive about $73.5M terminal value. This amount is about 69% of the total terminal value at the end of year 7.
4) What are the forecasted cash flows, rates of return on investment, and value created for Burns and Irvine under the debt and equity financing alternatives?
As you can see in the chart below, in respect to equity financing, the forecasted cash flows begin negative, and then gradually increase until a highly increase terminal sell price. The IRR of the investment will be 559%. And the value created from their very small investment will be around $50M in only a 7 year period.
As for debt financing, the forecasted cash flows will also
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, as well as about a $6M outflow from paying back the 9% interest loan.
2) At what price must Harmonic repurchase the building from Frank Thomas to produce his required 15% after-tax return?
In order for Frank Thomas to earn his 15% after tax return, Harmonic must buyback the building for just over $11M. The calculations can be seen in the chart below.
3) What proportion of the terminal value must be distributed to Comet Capital to produce its required 25% before-tax rate of return?
In order for Comet Capital to produce its 25% before tax return, they must receive about $73.5M terminal value. This amount is about 69% of the total terminal value at the end of year 7.
4) What are the forecasted cash flows, rates of return on investment, and value created for Burns and Irvine under the debt and equity financing alternatives?
As you can see in the chart below, in respect to equity financing, the forecasted cash flows begin negative, and then gradually increase until a highly increase terminal sell price. The IRR of the investment will be 559%. And the value created from their very small investment will be around $50M in only a 7 year period.
As for debt financing, the forecasted cash flows will also