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The CFO of Flash Memory, Inc.

prepares the company's investing and financing

plans for the next three years. Flash Memory is a small firm that specializes in the
design and manufacture of solid state drives (SSDs) and memory modules for the
computer and electronics industries. The company invests aggressively in
research and development of new products to stay ahead of the competition.
Increased working capital requirements force the CFO to consider alternatives for
additional financing. In addition, he must also consider an investment opportunity
in a new product line that has the potential to be extremely profitable. Students
must prepare financial forecasts, calculate the weighted average cost of capital
(WACC), estimate cash flows, and evaluate financing alternatives. This case is
especially recommended as a final exam case for a standard MBA-level course in
corporate finance. Subjects Include: Capital Budgeting, Cash Flows, Financial
Forecasting, Long Term Financing, Net Present Value (NPV), and Weighted
Average Cost of Capital (WACC)
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 Flashs 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
Flashs alternatives?

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 Flashs 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 Flashs
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,