Michelle (Shu Yu) Chen
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...
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