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This case study entitled "North Village Capital Private Equity" deals with the development of three financing scenarios. It also discusses which financial and capital structure is best suited to the case at hand in managing industrial risks but at the same time would lead to a positive rate of return.
James E. Hatch; Richard Lam
Harvard Business Review (910N10-PDF-ENG)
April 29, 2010
Case questions answered:
- Construct models for the three financing scenarios as described in the North Village Capital Private Equity case (no leverage, moderate leverage, high leverage).
- What are your expected returns for each scenario, given the assumptions outlined in the case?
- What concerns do you have about the EBITDA / Interest and Debt / EBITDA Covenants?
- What financing model do you recommend, given the concerns outlined in the case and the possible downside to the business given the global financial crisis?
- Do you recommend a bid for AlarmServe at $51 million?
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Case answers for North Village Capital Private Equity
This case solution includes an Excel file with calculations.
Summary Recommendation on Optimal Leverage for AlarmServe Inc. Acquisition
No Leverage Scenario
In the base case, we would earn a projected IRR of 22.5% while not breaking any covenants. In the downside case, we would earn a projected IRR of 18.2% with a 6% drop in revenue in 2010. It is assumed that revenues grow at the same rates as in the base case from 2011- 14.
Since we use equity to finance most of the acquisition, our projected IRRs are low. We do not recommend this capital structure as there is a possibility that we will not be able to earn an IRR greater than the hurdle rate if the recession causes a revenue decline in 2010.
Moderate Leverage Scenario
In the base case, we would earn a projected IRR of 29.8% while not breaking any covenants. In the downside case, we would earn a projected IRR of 24.3% while breaking the anticipated Debt/EBITDA covenant for 2010 by…
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