1. Background of Flash Memory. Inc
Flash memory was founded in San Jose, California in the late 1990s. In 2010, there are six individuals held the top management positions, comprised the board of directors, and owned the entire equity in the firm.Flash specialized in the design and manufacture of solid state drives (SSDs)and memory modules which comprised the fastest growing segment in the overall memory industry.
SSDS market is huge and intensely competitive which reflects in product offerings, high rivalry, and low profit margins as a percent of sales. Flash’s competitions include Intel, Samsung, Micron Technology, etc. Due to theproducts ‘characteristic and stiff competitors, its sales life cycle is short, usually only six years. In order to fix this risk, Flash aggressively spent on research and development to improve its existing product lines and add new ones. Flash believed the reputation of their products was one of its key competitive advantages and decided to maintain this reputation. Flash had used notes payable obtained from the company’s commercial bank, and the bank was willing to lend up to 70% of the face value of receivables. With the development of company, Flash’s sales increased rapidly which means there required a large increase in working capital, internal cash flow had not been sufficient to fund this increase in receivables and inventories. So Flash hopes bank to lend up to 90% of a company’s existing accounts receivable balances. The price of higher lending is higher interest rate: increase from prime +4% to prime plus 6% on the total outstanding loan balance to Flash, based off the May 2010 prime rate of 3.25%.
2. Problem Statement
Brown, the CFO of Flash, faces an investment opportunity. It is a major new product line, which was expected to have a significant impact on the company’s sales, profits, and cash flows. The product was believed to be superior to existing memory products, and would therefore command gross margins of 21% throughout its life. Flash’s design and marketing people were very excited about this new product line, believing its combination of speed, size, density, reliability, and power consumption and would make it a winner in the fastest growing segment of the memory industry.
This new product line had been in development for the past nine months, and $400,000 had already been spent. It is believed to generate sales of at least $21.6 million in 2011 and $28 million in 2012 and 2013, before falling off to $11 million in 2014 and $5 million in 2015. New plant and equipment costing $2.2 million must be purchased, and this specific equipment would be depreciated straight-line to zero salvage value over its five-year life. But Flash has reached the limit of loan from bank (70% of the face value of receivable) recently, if Flash wants to lend up to 90%, the interest rate will be increased to 9.32%. Another way instead of lending up is issue new common shares. So, Brown needs to decide:
1) Forecast Flash’ financial situation in the following years with the interest rate 9.32% and analysis its financial status.
2) Analysis project to see whether take it or not; if take, how to raise its capital.
3. Economic Analysis
Flash’s Financial Situation
Lots of figures and index are given by the article but still some are assumed by personal. Such as “Notes payable”, its definition is short debt (buying equipment’s, etc.). The number of this figure should keep the total assets equal total debts. Other assumed figures please see the Table1&2. After filling all the data in the table, we can get Flash’s income statement and balance sheet from 2007 to 2014. (Table1&2) I will analyze company’s financial situation with some key financial ratios. a)
Figure2 shows the trend of Current Ratio and Quick Ratio(Figure2) from 2007 to
2014.We can see the two ratios have similar trends and become decrease since 2007 which means current debt increase faster than...
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