The Purchase of Harmonic Hearing Co.
Harmonic Hearing Co. Case
Recommendation
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 402.5% and also fulfills Comet Capital’s required rate of return of 27% (Appendix B). The main advantage of equity financing over debt financing, displayed in this case and in the real world, is the financial freedom and stability offered by the private equity firm. Burns and Irvine do not have to deal with the large burden of paying back debt. This report will compare the two financing alternatives proposed and highlight the pros and cons of each scenario. In addition, potential risks will be addressed and possible scenarios that may affect the valuation in the future will be looked at.
Harrison Price’s Proposal (Debt)
The proposal put forth by Harrison Price used a combination of the individual alternatives identified by Burns and Irvine. The heavy majority of the financing would come through debt, which would allow the duo to “retain 100% ownership of Harmonic.” This is a significant advantage of this proposal as Burns and Irvine will not have to worry about keeping investors happy and will also have full control of the operations and direction of the company. Another advantage of debt financing presented in this case is the reduced income tax. The interest being paid on the loans is tax-deductible meaning
Recommendation
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 402.5% and also fulfills Comet Capital’s required rate of return of 27% (Appendix B). The main advantage of equity financing over debt financing, displayed in this case and in the real world, is the financial freedom and stability offered by the private equity firm. Burns and Irvine do not have to deal with the large burden of paying back debt. This report will compare the two financing alternatives proposed and highlight the pros and cons of each scenario. In addition, potential risks will be addressed and possible scenarios that may affect the valuation in the future will be looked at.
Harrison Price’s Proposal (Debt)
The proposal put forth by Harrison Price used a combination of the individual alternatives identified by Burns and Irvine. The heavy majority of the financing would come through debt, which would allow the duo to “retain 100% ownership of Harmonic.” This is a significant advantage of this proposal as Burns and Irvine will not have to worry about keeping investors happy and will also have full control of the operations and direction of the company. Another advantage of debt financing presented in this case is the reduced income tax. The interest being paid on the loans is tax-deductible meaning