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Provide a summary of the decision confronting management in which the debt




Harmonic Hearing;1. Provide a summary of the decision confronting management in which the debt versus equity financing alternatives to finance the purchase of a hearing aid manufacturer are explained.;2. Discuss the problem of underinvestment for the debt financing alternative.;3. Discuss the reduction of Burns's and Irvine's ownership and the presence of Comet Capital as an owner under the equity financing alternative.;4. Create 2 tables of finacial forecasts under the debt and equity alternatives.;5. Select the preferred method of financing.;Attachment Preview;Harmonic Hearing Co.PDF Download Attachment;4271;REV: NOVEMBER 10, 2011;HOWARD H. STEVENSON;CRAIG STEPHENSON;Harmonic Hearing Co.;The year that began on January 1, 2011, was sure to be eventful for Harriet Burns and Richard;Irvine. During the first week of January they had decided to purchase Harmonic Hearing Co., where;they had worked together for several years. Harmonic, a small and privately owned firm which;developed, manufactured, and distributed hearing aids, was consistently profitable and available for;purchase from the founder. As well-informed insiders, Burns and Irvine understood both the;hearing aid industry and Harmonic, and they believed the opportunities in the industry and potential;returns from the company outweighed the risks associated with ownership.;While the decision to proceed with the purchase of Harmonic had been relatively easy, arranging;the financing for the transaction was proving to be more difficult. Since the go decision had been;made in early January, Burns and Irvine had been exploring possible sources of financing, and;although they had learned much about alternatives for funding the purchase of Harmonic, they;needed to decide how to combine these sources into a complete package which would allow them to;conclude the transaction. Specifically, Burns and Irvine had to determine the costs and benefits of the;available financing alternatives and, based on this information, select the alternative that offered the;best combination of cost, expected return to their ownership interest, and financial flexibility.;Background;Harmonic Hearing Co. was founded by Otis Wren, a professor of Audiology at a well-known;Texas medical college. Wren was active in the study and treatment of hearing loss, and his work was;facilitated by significant advances being made in hearing aids. Bulky vacuum tube hearing aids had;been replaced first with transistor models during the 1950s and then with devices utilizing integrated;circuits in the 1960s, producing hearing aids that were smaller, lighter, and more effective.;Recognizing the benefits of modern aids for the hearing impaired, Wren founded Harmonic Hearing;Co. in 1974, and the company had been a small but successful competitor in the industry since that;time. Harmonics most recent financial statements, which are presented in Exhibit 1, show the;companys current performance.;After 30 years as the sole owner and chief executive officer, Wren had retired from active;management in 2004, naming then-chief designer Harriet Burns as his successor. Under Burns the;HBS Professor Howard H. Stevenson and Babson College Professor Craig Stephenson prepared this case solely as a basis for class discussion and;not as an endorsement, a source of primary data, or an illustration of effective or ineffective management. This case, though based on real events;is fictionalized, and any resemblance to actual persons or entities is coincidental. There are occasional references to actual companies in the;narration.;Copyright 2011 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685;write Harvard Business Publishing, Boston, MA 02163, or go to This publication may not be digitized;photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.;Purchased by BILAL AL (BILALALNA@GMAIL.COM) on March 26, 2013;4271 | Harmonic Hearing Co.;company experienced continued success as a niche player in the industry, and in late 2010 Wren had;decided it was time to step away from Harmonic entirely and sell the company. Upon making this;decision Wren had approached Burns about purchasing the company for 14 times Year 2010 net;income, and she had immediately told Wren that she was indeed interested in buying Harmonic at;that price. Burns also indicated that she would need some time to arrange the necessary financing;and Wren had given her three months to complete the purchase. Burns also believed that by bringing;in a partner, she would increase the likelihood of securing the necessary financing, so she asked;Richard Irvine, who had been Harmonics chief designer since Burns had become CEO, if he wanted;to be a member of the new ownership team. Irvine agreed that the purchase of Harmonic was an;excellent opportunity, and he happily accepted the offer.;From their experience at Harmonic, Burns and Irvine understood hearing aids and the hearing aid;industry very well. Although the global industry was dominated by six multinational giants (Great;Nordic A/S, Siemens GmbH, Sonova Holding AG, Starkey Laboratories, Inc., Widex A/S, and;William Demant Holdings A/S), many small companies like Harmonic continued to operate;successfully in the industry. In spite of high rivalry and industry consolidation, gross profit margins;around 60%, and net profit margins of 10% to 15%, were commonly reported by the publicly owned;competitors. Success in the industry required continuous investment in proprietary technologies and;the development of new devices, but these levels of profitability produced high rates of return on;internal investment. In addition, the potential market for hearing aids in the United States alone was;very large, with the hearing-loss population estimated at 34.3 million in 2008, but fewer than 25% of;Americans who would benefit from a hearing aid actually using and owning one. Demographic;changes, specifically the graying of America, as the baby boom generation ages, would only;increase the potential market for Harmonics hearing aids. Knowing these facts, Burns and Irvine;were convinced the purchase of Harmonic was a great opportunity, and they worked to structure a;funding package which would allow them to become the firms new owners.;Financing the Transaction;Otis Wren and Harriet Burns had agreed to a purchase price of 14 times Year 2010 net income, or;$25.2 million, if Burns and Irvine could obtain this amount of financing they would be able to;purchase Harmonic Hearing Co. The prospective owners also realized, however, that if they raised;precisely this amount of capital and used it all to purchase the company they would have little ability;to take advantage of profitable investment opportunities, or to act to solve the problems that arise;when running any business.;The constraint imposed on Burns and Irvine if they could only obtain this minimum amount of;financing would also have immediate and significant implications for the future of the company.;Harmonic was currently in the final development stages of an important new hearing aid, and;additional funding was required to complete development and successfully manufacture and market;this device. New products with an attractive combination of performance specifications and price;were necessary to compete and succeed in the industry, and this new and much-improved hearing;aid was expected to produce sales, profits, and cash flows very soon after its introduction. If;sufficient funding could be obtained to both purchase the company and bring the new hearing aid to;market, Harmonic would quickly generate additional sales and profits. If, instead, Burns and Irvine;obtained financing for the purchase price alone, they would have to rely on internally generated cash;flow to complete development of the new device. This would significantly reduce the products;value, its introduction would be delayed, sales and profits would be pushed into the future, and;these sales and profits would likely be reduced because competitors would seize market share from;Harmonic while it waited for the new and improved hearing aid.;2;BRIEFCASES | HARVARD BUSINESS SCHOOL;Purchased by BILAL AL (BILALALNA@GMAIL.COM) on March 26, 2013;Harmonic Hearing Co. | 4271;The chosen financing alternative would therefore impact not only their purchase of Harmonic, but;its products and future prospects as well.;Valuing Harmonics Assets;Burns and Irvine believed the companys assets could be an important source of financing for the;transaction, so they met with the companys commercial banker to discuss this possibility. Their;banker told them that Harmonics assets would support some financing, but the amount would;depend on the market value of the assets. This analysis was quickly performed, and it was;determined that the market value of the firms assets were greater than both the book value and the;agreed-upon purchase price. The results of this market value analysis are presented in Exhibit 2.;Beyond the numbers, this analysis revealed additional information about the assets represented in;Figure 1 below;Figure 1;Cash;The true value of the companys cash was represented by the $1.1;million balance. Burns and Irvine believed $600,000 was sufficient to;meet the companys base liquidity needs.;Accounts receivable;Harmonic distributed its hearing aids through audiologists and;hearing instrument specialists, who sold and fit the devices to hearingimpaired consumers.;Harmonic served these hearing-care;professionals with a direct sales force and technical support, delivering;superior customer service. Uncollectible accounts receivable were;closely monitored and reserved, so the $7,231,000 balance was a true;reflection of value.;Inventory;Modern hearing aids were complex technological devices;constructed with microphones, receivers, and digital signal processing;(DSP) chips. Inventory was stated at the lower of cost or market, and;the $2,554,000 shown on the balance sheet represented the current;market value of Harmonics inventory.;Equipment;Much of Harmonics equipment had been recently purchased, but;depreciation reduced its book value to $5,835,000, approximately $3;million below its estimated market value.;Building and land;Otis Wren had purchased the building and land back in 1974 when;the company was founded. The site was located in Plano, Texasat;that time far north of Dallasbut since the 1970s the metro area had;grown to and past Plano, and the property had significantly;appreciated in value. The building had been expanded and was;well-maintained, and was in excellent overall condition. It contained;all the companys development, manufacturing, distribution, and;management activities, and was sufficiently large to handle any;expected expansion in the near future. Burns hired an expert to;evaluate the property, which resulted in the following market value;estimates: 1) Land: $3,000,000, 2) Building: $7,500,000.;HARVARD BUSINESS SCHOOL | BRIEFCASES;Purchased by BILAL AL (BILALALNA@GMAIL.COM) on March 26, 2013;3;4271 | Harmonic Hearing Co.;Financing Alternatives;After carefully analyzing the development work and investment necessary to complete and;launch the new hearing aid, Burns and Irvine concluded an additional $3.1 million would be;sufficient. This increased their ideal funding target to $28.3 million, which would need to come from;the following potential sources they had identified in Figure 2 below;Figure 2;1.;A tax-exempt pension fund, which;was an active investor in the local;business community;2.;Frank Thomas;A successful artist, investor, and;close friend of Irvine;3.;Collin Bank of Commerce;A local institution which;specialized in working capital;financing;Would lend up to 75% of the value;of accounts receivable, and 50% of;the value of inventory. These loans;would carry an interest rate of 9%.;4.;Austin Commercial;Finance;Asset-backed financing group;Agreed to purchase Harmonics;existing equipment for $7.0;million and lease it back to the;company for $2.0 million per;year for five years. At the end;of five years, Harmonic could;purchase the equipment from;Austin for the expected fair;market value of $500,000.;5.;Bank of McKinney;Harmonics primary bank, as well;as the bank where Burns and Irvine;maintained their personal accounts;6.;4;Denton Retirement;System;Committed to lend up to 80% of the;appraised value of the land and;building in return for a 25-year;mortgage at a 7% interest rate;Comet Capital;A Dallas-based private equity firm;Agreed to invest up to $2.5;million if it would generate an;after-tax return greater than or;equal to 15%. Thomass;marginal tax rate was 40% on;ordinary income and 20% on;capital gains.;Willing to lend $300,000 to;Harmonic at a 10% interest rate, if;Burns and Irvine were also willing;to personally guarantee the loan.;Although Burns and Irvine were;not high net-worth individuals;they each had $125,000 in liquid;assets which they could contribute;to the purchase of Harmonic.;Believed Harmonic had;excellent prospects, and was;willing to invest up to $30.0;million, if the capital was;expected to earn a 25% beforetax internal rate of return.;Comet would require, however;that Burns and Irvine combined;to invest $250,000 of their own;funds in the transaction.;BRIEFCASES | HARVARD BUSINESS SCHOOL;Purchased by BILAL AL (BILALALNA@GMAIL.COM) on March 26, 2013;Harmonic Hearing Co. | 4271;With these available financing alternatives, Burns and Irvine met with two local experts for advice;on how to structure the purchase of HarmonicHarrison Price, a specialist in economic feasibility;studies, and Joe Fowler, a successful Dallas investor and business executive.;Harrison Prices Proposal;The financing structure recommended by Price utilized many of the individual alternatives;identified by Burns and Irvine;Frank Thomas would buy the building and land for the appraised value of $10.5 million, and;then lease it back to the company. Harmonics rent would equal 12.5% of the appraised value;in year one, and would increase by 6% each year. Thomas would invest $2.1 million of his;own funds and take out a mortgage for the remaining $8.4 million from the Denton;Retirement System. Burns and Irvine would receive the sale price, and Thomas would receive;the cash flow and any tax losses or gains from the lease and ownership. At the end of year;seven, Harmonic would buy the building and land back at an agreed-upon price, with this;price large enough to deliver a 15% after-tax rate of return to Thomas. The details of this;transaction are presented in Exhibit 3.;The remaining funds to purchase Harmonic came from the following sources in Figure 3;Figure 3;Excess cash;Borrowing backed by accounts receivable;Borrowing backed by inventory;Sale and leaseback of equipment;Loan to Harmonic, guaranteed by Burns and Irvine;Personal funds of Burns and Irvine;$500,000;$5,423,000;$1,277,000;$7,000,000;$300,000;$200,000;This structure would allow Burns and Irvine to retain 100% ownership of Harmonic. This benefit;however, came at significant cost. Fixed payments and risk: rent, lease, and interest expenses would;be large, ongoing obligations of the company. If forecasted sales, profits, and cash flows fell below;expectations, the company could fall into financial distress. The new hearing aid would take one year;to internally generate sufficient cash to complete development. This would delay Harmonics launch;of the new hearing aid and reduce their market share when they entered the market. The different;sales scenarios for the new hearing aid are presented in Exhibits 4 and 5. Furthermore, when the;new device was finally developed, Harmonic could not immediately manufacture and market it, the;company would not have the necessary funds. This meant subcontracting production of the hearing;aid, resulting in cost of goods sold increasing to 47% of sales, and reducing gross profit margins to;53% of sales. Under this alternative, Harmonics working capital investment in the new hearing aid;would consist of receivables only because the subcontractor would carry the inventory and payables.;Joe Fowlers Proposal;Fowler believed the purchase should be funded with private equity capital. This would;significantly reduce the ownership stake held by Burns and Irvine in Harmonic, but it would reduce;the risk of the transaction and would allow the company to complete and launch the new hearing aid.;This financing structure had several other important advantages. Regarding the investment, the;HARVARD BUSINESS SCHOOL | BRIEFCASES;Purchased by BILAL AL (BILALALNA@GMAIL.COM) on March 26, 2013;5;4271 | Harmonic Hearing Co.;company could invest in working capital and equipment for internal manufacture of the new device.;This would reduce cost of goods sold to 38% of sales, and would create valuable depreciation;charges. There would be no rent, lease, or interest expenses. Finally, Burns and Irvine would invest a;total of $250,000 of their own capital in the purchase of Harmonic.;The Decision;After examining the alternative structures prepared by Harrison Price and Joe Fowler, Burns and;Irvine realized they were significantly different, one relied almost entirely on debt finance, and the;other was all-equity. To fully understand the positives, negatives, and trade-offs of each structure;they would have to forecast the revenues, expenses, cash flows, and rates of return on investment;under both alternatives. They began their analysis by preparing a list of critical assumptions, which;are presented in Exhibits 4 and 5. With these assumptions as their starting point, Burns and Irvine;began the analysis which would allow them to choose the better financing structure.;6;BRIEFCASES | HARVARD BUSINESS SCHOOL;Purchased by BILAL AL (BILALALNA@GMAIL.COM) on March 26, 2013;Harmonic Hearing Co. | 4271;Exhibit 1;Income Statements and Balance Sheets, Year 2010;Income Statement ($000s);2010;Sales revenue;Cost of goods sold expense;Gross profit margin;$ 29,366;$ 12,442;$ 16,924;100.00%;42.37%;57.63%;Selling, general & administrative expense;Research & development expense;Depreciation expense;Operating income;$ 10,527;$ 2,619;$ 1,050;$ 2,727;35.85%;8.92%;3.58%;9.29%;Interest expense;Income before income taxes;$;0;$ 2,727;0.00%;9.29%;Income tax expense;Net income;$ 927;$ 1,800;3.16%;6.13%;Balance Sheet ($000s);2010;% of Sales;% of assets;Cash;Accounts receivable;Inventory;Equipment;Building & land;Total assets;$ 1,100;$ 7,231;$ 2,554;$ 5,835;$ 3,900;$ 20,620;5.33%;35.07%;12.39%;28.30%;18.91%;100.00%;Accounts payable;Owners' equity;$ 1,533;$ 19,087;7.43%;92.57%;$ 20,620;100.00%;Total liabilities & owners' equity;Exhibit 2;Asset Value Comparisons as of Year-End 2010;($000s);Book Value;Cash;Accounts receivable;Inventory;Equipment;Building & land;$;$;$;$;$;Appraised;Value;$ 1,100;$ 7,231;$ 2,554;$ 8,835;$ 10,500;$ 20,620;Total assets;1,100;7,231;2,554;5,835;3,900;$ 30,220;HARVARD BUSINESS SCHOOL | BRIEFCASES;Purchased by BILAL AL (BILALALNA@GMAIL.COM) on March 26, 2013;7;Purchased by BILAL AL (BILALALNA@GMAIL.COM) on March 26, 2013;Real Estate Transaction;$;-$;-$;$;$;5,346;$ 277,367;$ 142,105;$ 140,608;-$ 40,177;$ 288,462;$ 132,808;$ 115,477;8,910;3,564;$ 587,613;$ 578,703;$ 521,038;$ 588,000;66,962;26,785;$1,391,250;$ 330,750;$ 195,520;$ 277,367;2;$8,125,087;$1,312,500;$ 315,000;$ 188,000;$ 288,462;1;2;$ 578,703;$ 142,105;3;88,642;35,457;$ 167,832;$ 53,185;$ 266,699;$ 152,052;$;-$;$ 657,398;$ 568,756;$1,474,725;$ 347,288;$ 203,341;$ 266,699;3;$7,973,036;$ 568,756;$ 152,052;4;5;6;$ 263,242;$ 212,418;$ 237,094;$ 186,270;$ 354,029;-$ 141,612;$ 888,567;$ 534,538;$1,756,421;$ 402,029;$ 228,731;$ 237,094;6;$7,449,986;$ 534,538;$ 186,270;$11,000,000;$ 229,023;$ 156,529;$ 246,578;$ 174,084;$ 260,881;-$ 104,352;$ 807,605;$ 546,724;$1,657,001;$ 382,884;$ 219,933;$ 246,578;5;$7,636,256;$ 546,724;$ 174,084;$10,500,000;$ 360,123;$ 7,250,677;$ 2,889,200;$10,000,000;$ 260,123;$ 7,250,677;$ 2,489,200;$ 3,289,200;$11,000,000;$ 460,123;$ 7,250,677;$ 2,300,616;$ 460,123;$10,500,000;$ 8,699,384;$ 1,800,616;$ 360,123;$11,000,000;$ 8,699,384;$10,500,000;$ 197,263;$ 103,517;$ 256,441;$ 162,696;$ 172,528;-$ 69,011;$ 730,641;$ 558,112;$1,563,209;$ 364,652;$ 211,474;$ 256,441;4;$7,810,340;$ 558,112;$ 162,696;$ 1,300,616;$ 260,123;b Calculated as original purchase price of $10,500,000 minus accumulated depreciation of $1,800,616;a Calculated as 150% declining balance for 39 years to zero salvage value;- Mortgage balance owed;Net cash proceeds;Gain on sale;Capital gains tax owed (20%);Calculation of net cash proceeds;Sale price;- Capital gains tax owed;Hypothetical Cash Flows to Frank Thomas from Sale of Building and Land to Harmonic at the End of Year 7;Assumed agreed-upon sale price;$10,000,000;Calculation of capital gains tax owed;$10,000,000;Sale price;$ 8,699,384;- Book valueb;- Principal payments;Net after tax cash flow;+ Tax benefit (cost) at 40%;Net income;+ Depreciation expense;- Interest payments;Income before income taxes;- Depreciation expense on buildinga;Operating income;Rent received from Harmonic;- Maintenance costs;- Property taxes paid;Annual Real Estate Cash Flows to Frank Thomas;Year;$8,267,192;Principal balance of mortgage;1;$ 588,000;$ 132,808;Interest payments;Principal reduction;Amortization Schedule;Year;Mortgage Assumptions;- 25-year maturity;- $8,400,000 loan amount;- 7.0% interest rate;- $720,808 constant annual payment;Exhibit 3;7;$ 300,059;$ 271,393;$ 227,975;$ 199,309;$ 452,322;-$ 180,929;$ 973,821;$ 521,499;$1,861,806;$ 422,130;$ 237,880;$ 227,975;7;$7,250,677;$ 521,499;$ 199,309;4271;-8-;Harmonic Hearing Co. | 4271;Exhibit 4;Key Assumptions by Financing Alternative;Sales (refer to Exhibit 5);-;-;-;All debt: Burns and Irvine believed it would take one year to internally generate the $1,100,000;necessary to complete development of the new hearing aid. Harmonic would not launch the device;until year two, and sales in this and following years would be lower as the delay would result in lower;market share.;All equity: Harmonic could immediately fund final development of the new hearing aid, which would;be completed during year one. The device would be launched later in year one, generating sales in this;and following years.;Both alternatives: sales growth of existing hearing aids would slow and eventually decline.;Cost of goods sold;-;All debt: COGS on the new hearing aid are 47% of sales.;All equity: COGS on the new hearing aid are 38% of sales.;Both alternatives: COGS on existing hearing aids are 44% of sales.;Selling, general & administrative;-;All debt: SG&A is 36% of sales, less maintenance costs and property taxes paid by Frank Thomas as;owner of the building and land, as shown in Exhibit 3.;All equity: SG&A is 36% of sales, with maintenance costs and property taxes included in this number.;Research & development;-;-;$1,100,000 required to complete development on the new hearing aid;o All debt: Funded out of cash flow, assume this can be completed by the end of year one.;o All equity: Funded immediately and completed early in year one.;Both alternatives: $600,000 of ongoing expenditures each year to support products.;Depreciation;-;-;All debt: Zero in years one through five, Harmonic owns no depreciable assets during this period.;Starting in year six Harmonic will have depreciation of $100,000 per year as the $500,000 purchase price;of the equipment is depreciated.;All equity: Depreciation on existing fixed assets equals $1,167,000 per year until they are fully;depreciated. Depreciation on new equipment is calculated using the straight-line method, a five-year;useful life, and zero salvage value, beginning in the year of purchase.;Rent payments;-;All debt: As presented in Exhibit 3.;All equity: Zero.;Lease payments;-;-;All debt: Annual lease payments on the production equipment are $2.0 million per year for five years.;At the end of year five Harmonic will purchase the equipment for the expected fair market value of;$500,000. These terms were specified to ensure this is an operating lease, and the annual lease payment;is a deductible expense on Harmonics income statement.;All equity: Zero.;Interest;-;All debt;o 9% interest is paid on the $5,423,000 loan backed by accounts receivable, and the $1,277,000 loan;backed by inventory. These loan balances are outstanding over the seven-year forecast period, no;principal repayments are made.;o 10% interest is paid on the $300,000 loan backed by the personal guarantee of Burns and Irvine.;The principal and interest payments on this loan is amortized on the following schedule;HARVARD BUSINESS SCHOOL | BRIEFCASES;Purchased by BILAL AL (BILALALNA@GMAIL.COM) on March 26, 2013;9;4271 | Harmonic Hearing Co.;Exhibit 4 (continued);Year;1;Interest;Principal;-;$30,000;$49,139;2;$25,086;$54,053;3;$19,681;$59,458;4;$13,735;$65,404;5;$7,194;$71,945;All equity: Zero.;Income taxes;-;Harmonics income tax rate is 34%.;Investment;-;-;All debt: Harmonic will purchase the building and land from Frank Thomas at the end of year seven at;a price that will result in a 15% annual after-tax rate of return to Thomas. Additional working capital;investment for existing hearing aids, consisting of receivables, inventory, and payables, will be the;yearly change required to maintain accounts receivable equal to 24.6% of sales, inventory equal to;20.5% of cost of goods sold, and accounts payable equal to 12.3% of cost of goods sold. Additional;working capital investment for the new hearing aid will be only the yearly change required to maintain;accounts receivable equal to 24.6% of sales.;All equity: Additional working capital investment, consisting of receivables, inventory, and payables;will be the yearly change required to maintain accounts receivable equal to 24.6% of sales, inventory;equal to 20.5% of cost of goods sold, and accounts payable equal to 12.3% of cost of goods sold.;Additional investment in equipment will be;Year;1;$700,000;2;$150,000;3;$50,000;4;5;$0;$0;Principal repayments;-;All debt: Principal payments are made on the $300,000 loan only. The repayment schedule for this loan;is presented above under Interest.;All equity: Zero.;Terminal value;-;Both alternatives: Assume the company will be sold at the end of year seven for 14 times net income.;Other;-;10;Additional assumptions required to analyze the two financing alternatives include;o In the all debt alternative, Harmonics annual free cash flows are distributed to Burns and Irvine, as;is the terminal value of the company.;o In the all equity alternative, both Comet Capital, and Burns and Irvine, receive annual cash flows;and terminal cash flows. Harmonics annual free cash flows are distributed 2/3 to Comet and 1/3;to Burns and Irvine. Terminal cash flows are split in the proportion required to produce a 25%;internal rate of return to Comet.;o Determine the cash flows and rates of return to Harriet Burns and Richard Irvine on a joint basis.;Do not make any assumptions on how their ownership interest will be allocated.;o Calculate the cash flows and rates of return to Comet Capital, and Burns and Irvine, on a prepersonal tax basis. Include taxes at the corporate level in the analysis, but do not include any;personal taxes on annual or terminal distributions.;o In the all debt alternative, include the repurchase of the building and land, and equipment, in the;analysis. The loans backed by accounts receivable and inventory will also be repaid out of this;terminal value at the end of year seven.;BRIEFCASES | HARVARD BUSINESS SCHOOL;Purchased by BILAL AL (BILALALNA@GMAIL.COM) on March 26, 2013;Purchased by BILAL AL (BILALALNA@GMAIL.COM) on March 26, 2013;Existing hearing aids;New hearing aids;Total sales;Sales Under Equity Financing;Year;Existing hearing aids;New hearing aids;Total sales;$ 31,454,000;$ 7,551,000;$ 39,005,000;$ 30,687,000;$ 3,236,000;$ 33,923,000;2;$ 34,285,500;$ 30,687,000;1;$ 31,454,000;$ 2,831,500;2;$ 30,687,000;$;0;1;Sales Forecasts by Financing Alternative;Sales Under Debt Financing;Year;Exhibit 5;$ 42,810,000;$ 31,861,000;$ 10,949,000;3;$ 38,468,125;$ 31,861,000;$ 6,607,125;3;$ 45,975,000;$ 30,427,000;$ 15,548,000;4;$ 40,007,375;$ 30,427,000;$ 9,580,375;4;$ 49,754,000;$ 28,298,000;$ 21,456,000;5;$ 41,902,500;$ 28,298,000;$ 13,604,500;5;$ 52,200,000;$ 23,234,000;$ 28,966,000;6;$ 42,008,000;$ 23,234,000;$ 18,774,000;6;$ 54,592,000;$ 15,488,000;$ 39,104,000;7;$ 40,833,250;$ 15,488,000;$ 25,345,250;7;4271;-11-


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