Harmonic Hearing Co.

By: Howard H. Stevenson and Craig Stephenson

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Synopsis: Harmonic is a small, privately held manufacturer of hearing aids. Harriet Burns and Marc Davis, two employees at Harmonic, have an opportunity to purchase the company from the founder. As well-informed insiders who understand the industry, Burns and Davis believe the benefits of ownership far outweigh the risks. While the decision to purchase Harmonic is easy for them, arranging financing proves more difficult. The company is preparing to launch a new hearing aid product and Burns and Davis want the financing package to include the additional capital required to complete both the development and the launch. Two financing alternatives are presented: one is virtually all debt-financed, the other all equity. The financing structure Burns and Davis select will have a significant impact on the products and future prospects of the company. Students must analyze the two financing alternatives, determine the advantages and disadvantages, and recommend the best option.