Flash memory was founded in late 1990s. The small firm specialized in designing and manufacturing solid state drives and memory modules. Given the facts that products had short life cycles, and technologies changed frequently in the market, the competition was intensive in the industry and product profit margin was low. In order to stay ahead of competition, Flash memory needed to highly invest in R&D to create cutting-edge products so that customer’s wants and needs could be met.
Currently, Flash memory enjoy the good reputation of its products and continue to focus on R&D which allows the company to maintain its competitive advantage. An investment opportunity in a new product line that has the potential to be extremely profitable is presented to flash memory as well. Significant investments in R&D and the new product line requires increasing working capital. Therefore, flash memory has a strong need of financing as low profit margin doesn’t provide enough cash flows for the future growth and the company also reach the bank’s lending limit. Three alternatives for additional financing are available for consideration.
This report analyzes the new project based on the estimated WACC to decide if Flash memory should accept or reject this project. Furthermore, the report prepares three years pro-forma for 2010, 2011, 2012 to show the impact on the income statement with and without the new project so that financing requirements based on each scenario can be determined. Additionally, this report lists the pros and cons of three financing alternatives: obtaining external financing through factoring group or a private sale of common stock; rely solely on Internal financing through reinvestment of Flash’s earnings. Finally, this report makes recommendations to the board of directors about the investment decision on the new product line associated with the source of financing.
Q1: Forecast income statements and balance sheets for 2010, 2011 and 2012