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? [continues]
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