FNCE 174

May 18th, 2015

Harmonic Hearing Case Study

1.) Please refer to the spreadsheet for the FCF model. Under the debt scenario, the terminal value of the company is $45,289,826. Under the equity scenario, the terminal value of the company is $106,237,503.48.

For all debt, there will be a $13M cash outflow to buy back the building, a $7.25 M cash outflow to pay back the mortgage to Collin Bank of Commerce and Bank of McKinney, and a $500k purchase of equipment. For all equity, the company will pay 2/3 of the cash flow in Year 7 to Comet Capital. Comet Capital is expected to earn a 25% before-tax internal rate of return.

2.) We will be able to calculate the net cash proceeds from the repurchased price of the real estate from Frank Thomas by setting NPV = 0 where NPV = PV (net cash proceeds from the repurchase price) + PV (Annual cash flows from the property) – Thomas initial investment, calculated at a 15% IRR.

With an IRR of 15%, the present value of all the annual cash flow is $770,347.27.

PV (net cash proceeds) = $770,347.27 - $2,100,000 = -$1,329,652.73

FV = $1,329,652.73*(1.15)^7

Net cash proceeds = $3,536,902.7

Calculations of capital gains tax owed:

(0.2)(X – $8,669,384) = Y

Calculations of net cash proceeds:

X – Y – $7,250,677 = $5,245,075.08

X – 0.2X + $1,733,876.8 – $7,250,677 = $3,536,902.7

0.8X = $9,053,702.2

X = $11,317,127

Harmonic must repurchase the building from Frank Thomas at $11,317,127 to produce his 15% after-tax required rate of return.

3.) Please refer to my calculations in the sheet named “Question #3”. 59% of year 7’s terminal value must be distributed to Comet Capital to produce its required 25% before-tax rate of return. The value created under the debt scenario is $37,089,386.37. The value created under the equity scenario is $53,099,690.74.

4.) 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