Flash Memory

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CORPORATE FINANCE

Case 1: Flash Memory, Inc.

Section B1 Group 1A

Executive Summary
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, where a combination of retained earnings and debt should be used before considering any sale of new equity. If possible, Flash should take up long term debt as the form of financing as it is currently not doing so. However, if long term debt financing is not available, Flash should increase its short term financing with the bank’s factoring group.

Contents
1. Current Projected Financial Statements (2010-2012)4
i. Pro-Forma Income Statement4
ii. Pro-Forma Balance Sheet4
Additional Financing Required5
2. Evaluation of Investment into New Product Line (2010-2015)6
Unlevered and levered Beta7
NPV Valuation with Weighted Average Cost of Capital8
Table 1: Impact on Pro-Forma Income Statement9
Table 2: Impact on Pro-Forma Balance Sheet10
Table 3: Additional Financing Required With Investments10
Table 4: Impact on Income Statement by Financing Decision12
Table 5: Impact on Pro-Forma Balance Sheet by Financing Decision13
Table 7: Advantages and Disadvantages of various Financing Alternatives15
4. Recommended financing alternative:16
5. Conclusion17

1. Current Projected Financial Statements (2010-2012)
i. Pro-Forma Income Statement

Pro-Forma Income Statement, 2010 – 2012 ($000s except earnings per share)|  | 2010| 2011| 2012|
Net sales| $120,000| $144,000| $144,000|
Cost of goods sold| $97,320| $116,784| $116,784|
Gross margin| $22,680| $27,216| $27,216|
| | | |
Research and development| $6,000| $7,200| $7,200|
Selling, general and administrative| $10,032| $12,038| $12,038| Operating income| $6,648| $7,978| $7,978|
| | | |
Interest expense| $735| $1,311| $1,553|
Other income (expenses)| -$50| -$50| -$50|
| | | |
Income before income taxes| $5,863| $6,616| $6,375|
| | | |
Income taxes| $2,345| $2,647| $2,550|
Net income| $3,518| $3,970| $3,825|
| | | |
Earnings per share| $2.36| $2.66| $2.56|

ii. Pro-Forma Balance...
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