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 …show more content…
If new sales projections fell by 10% each year, the company’s terminal value would be only $8.1 million and they would be unable to fulfill their loan requirements by the end of year seven (Appendix F). An even worse case scenario would be if the new hearing aid didn’t pan out and was delayed indefinitely. The terminal value would fall even further to $5.5 million and a substantial amount of cash would be needed to pay back their loans which would most likely lead to bankruptcy (Appendix G). Scenarios like the ones presented above must be evaluated if this path is the one Burns and Irvine are leaning towards. When taking the path of debt financing, it is wise for the company to have sufficient cash on hand in order to make all their final payments as a lot of leverage is required. With little cash on hand, Burns and Irvine are heavily relying on their revenue stream and any shakeup of their sales projections could cause them to lose their initial investment and eventually the company. Overall, Burns and Irvine will receive an IRR yield of 215.5% on their initial investment of $200,000 which is quite a good return especially when the IRR for the loan is only 7.4%.
Joe Fowler’s Proposal (Equity)
The proposal put forth by Joe Fowler would fund the financing via Comet Capital, a private equity firm. The main drawback of this proposal would be the reduction in ownership. Burns and Irvine would only receive one-third