The CFO of Flash Memory, Inc. prepares the company’s investing and financing plans for the next three years. Flash Memory is a small firm that specializes in the design and manufacture of solid state drives (SSDs) and memory modules for the computer and electronics industries. The company invests aggressively in research and development of new products to stay ahead of the competition. Increased working capital requirements force the CFO to consider alternatives for additional financing. In addition, he must also consider an investment opportunity in a new product line that has the potential to be extremely profitable. Students must prepare financial forecasts, calculate the weighted average cost of capital (WACC), estimate cash flows, and evaluate financing alternatives. This case is especially recommended as a final exam case for a standard MBA-level course in corporate finance. Subjects Include: Capital Budgeting, Cash Flows, Financial Forecasting, Long Term Financing, Net Present Value (NPV), and Weighted Average Cost of Capital (WACC)
For the Flash Memory Inc. case you will turn in both a write-up of your analysis and a spreadsheet that contains any financials or calculations you performed. The formal write-up should contain an overview of how you tackled specific issues presented in the case, how you set up the spreadsheet to present you analysis, and a discussion of any assumptions you are making. To guide you through the case, below are a set of questions you will need to address. Structure your written analysis and spreadsheet solutions around these questions. 1.Assuming the company does not invest in the new product line prepare forecasted income statements and balance sheets at year-end 2010, 2011, and 2012. Based on these forecasts, estimate Flash’s required external financing. Assume any external financing takes the form of additional notes payable from its commercial bank. Can Flash fund the continued growth and meet the borrowing requirements established by the bank?
If not what are some potential alternatives? 2.Evaluate whether Flash Memory should invest in the new product line discussed on page 4 of the case. a.Any decision to invest in the new product line will require an estimate of the discount rate (i.e., WACC). When estimating a WACC you should be clear on the inputs you used to calculate the cost of equity, cost of debt, and the relative weights of equity and debt. For this analysis use the target debt-to-equity ratio that is sought by the board of directors. 3.Estimate the pro-forma financial statements (i.e., income statement and balance sheet) for the years 2010, 2011, and 2012 assuming that Flash takes the new investment project and finances the project with debt. What issues might arise if Flash only uses debt financing? If debt financing turns out to have problems what are Flash’s alternatives?
As sales of Flash Memory Inc. (Flash) increases rapidly in the first few months of 2010, additional working capital is required to ensure smooth operations and maintain their current growth rate. However, Flash currently has almost reached its notes payable limit of 70% accounts receivables with its current commercial bank and thus, need to look for various alternative financing means to provide the required amount of funds it needs to finance its forecasted sales for year 2010 onwards. This report is written to provide an insight to Flash’s financial position for the following 3 years (2010 till 2012) through the use of pro-forma income statement and balance sheet. For Flash to be able to keep up with the sales projections, additional financing of $4.04million and $2.61million are required in 2010 and 2011.
In addition, Flash is also considering investing in a major new product line and a valuation analysis is done to determine whether the new product line should be invested or not. According to the various sales and expenses projection, a valuation analysis has shown that the new product line will be valued at a favorable NPV of approximately $2.8 Million using Flash’s weighted cost of capital as the discount rate. As such, in the event that the new product line is invested, additional financing will be required to initiate and maintain this product line in 2010, which amounts to S7.48 Million. Lastly, this report also provides an evaluation on various alternative financing methods that Flash can consider to obtain the additional funds needed to finance its forecasted sales of its existing and new product lines. These methods are: (1) Finance with Internal Financing, (2) Short Term Debt, (3) Long Term Debt and (4) Equity issuance. The recommended form of financing that Flash should seek is to finance its operations according to the Pecking Order Theory,