Flash memory analysis, Summaries of Economics

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J. Tennent,

Flash memory analysis

BMGT

Flash Memory Brief Analysis

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, estimated Flash’s required external financing: in this case all required external financing takes the form of additional notes payable from its commercial bank, for the same period. Income Statement ($000s except EPS) Actual Forecast 2007 2008 2009 2010 2011 2012 Sales $77,131 $80,953 $89,250 $120,000 $144,000 $144, Cost of goods sold $62,519 $68,382 $72,424 $97,320 $116,784 $116, Gross margin $14,612 $12,571 $16,826 $22,680 $27,216 $27, Research and development $3,726 $4,133 $4,416 $6,000 $7,200 $7, Selling, general and administrative $6,594 $7,536 $7,458 $10,032 $12,038 $12, Operating income $4,292 $902 $4,952 $6,648 $7,978 $7, Interest expense $480 $652 $735 $1,303 $1,389 $ Other income (expenses) ($39) ($27) ($35) ($50) ($50) ($50) Income before income taxes $3,773 $223 $4,182 $5,295 $6,538 $6, Income taxes $1,509 $89 $1,673 $2,118 $2,615 $2, Net income $2,264 $134 $2,509 $3,177 $3,923 $4, Earnings Per Share $1.52 $0.09 $1.68 $0.21 $0.26 $0. Balance Sheet ($000s except shares outstanding and book value per share) Actual Forecast 2007 2008 2009 2010 2011 2012 Cash $2,536 $2,218 $2,934 $3,960 $4,752 $4, Accounts receivable $10,988 $12,864 $14,671 $19,726 $23,671 $23, Inventories $9,592 $11,072 $11,509 $13,865 $16,638 $16,

2. What course of action do you recommend regarding the proposed investment in the new product line: Should the company accept or reject this investment opportunity? The IRR and NPV of the investment opportunity is as follows: IRR = (-0.4)+(-2.2)+(-0.3)+(21%-8.4%)(21.6)+[(21%-8.4%)(28)/(1+r)]+[(21%-8.4%)(28)/(1+r)^2]+ [(21%-8.4%)(11)/(1+r)^3]+ [(21%-8.4%)(5)/(1+r)^4] = 26% NPV = (-0.4)+(-2.2)+(-0.3)+(21%-8.4%)(21.6)+[(21%-8.4%)(28)/(1+6%)]+[(21%-8.4%)(28)/(1+6%)^2]+ [(21%-8.4%)(11)/(1+6%)^3]+ [(21%-8.4%)(5)/(1+6%)^4] = 7. The Net Present Value is 7.6 million which is greater than 0, and the IRR is 26% which is high so, Flash Memory should take the investment.
3. How does your recommendation from question 2 above impact your estimate of the company’s forecasted income statements and balance sheets, and required external financing in 2010, 2011 and 2012? How do these forecasted income statements and balance sheets differ if the company relies solely on additional notes payable from its commercial bank, compared to a sale of new equity? 2010 2011 $

Sales Cost of goods sold

R&D

SGA

Increase in operating income

Cash (3.3% of sales) AR (60 DSO) Inventories (52 days of COGS) Prepaid expenses (0.4% of sales) Net

AP (30 days of purchases, 60%cogs)

Accrued expenses (0.73% of sales) Other current liabilities (0.62% of sales)

4. As CFO Hathaway Browne, what financing alternative would you recommend to the board of directors to meet the financing needs you estimated in questions 1 thorough 3 above? What are the costs and benefits of each alternative? The best method of financing the investment would be a private sale of common stock to increase cash flow. Flash Memory can get 300,000shares at $25 per share. This means the company can raise 6,900, dollars. These funds can also help the company payback some of the bank debt to achieve their goal of keeping the debt-to-capital ratio at 18%. However, if the company cannot sell the common stock successfully, their only option will be to request more loans from bank. According to the NPV, it does not really matter how the company raises the fund for the investment as long as they do it. The company can either sell common stock or get a loan from the bank. Borrowing money from the bank to invest increases the risk of tightening the company’s cash flow. It also increases the cost of investing the project since the company has already reach the 70% notes payable limit. The interest expenses will be high at 9.25% of bank debt. This is against the company’s target of decreasing debt-to-capital ratio of 18%, so their first option should be to issue common stock.