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Assignment Sheet for January 16 (Flash Memory, Inc.

)
1.

Please read BM Chapter 29 and review Chapter 17 as well as 19. Read the
case Flash Memory, Inc. and answer the following questions.
2. 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 using forecasting assumptions on Exhibit 3. The amount for notes
payable can be calculated as the plug number to balance the balance sheet,
i.e. calculate the other balance sheet items (accounts receivable, inventory,
accounts payable, taxes payable, retained earnings etc) first and any
deficiency in the liabilities account is the balance for notes payable. As
stated in the case, you may calculate the interest expense for the year
based on the ending balance of notes payable as of the end of the previous
year. (Please note this is not the precise way of calculating interest
expense, but if you try to calculate precisely, you need to make a iteration
calculation, which is somewhat cumbersome.) For those who are going to
use excel to make the calculation, please utilize the excel spreadsheet that
contains Exhibit 1 to 4 of the case.
3. What is the companys weighted average cost of capital (WACC)? To
calculate WACC, please follow the following steps.
(1) First calculate the asset beta for the industry based on data in Exhibit 4.
In calculating asset betas, utilize the following formula.
Beta(asset)=Beta(debt)*D/V+Beta(equity)*E/V
V=D+E
E =market value of equity
Please use debt beta of 0.2 for both Micron and SanDisk. The average of
the asset betas calculated from the three comparable companies can be
used as the asset beta for the industry.
(Note)
You may want to review the note Leveraged Betas and the Cost of
Equity which was one of the assigned readings in Corporate Finance I.
The formula used in this note, i.e. Beta(U)=Beta(L)/(1+D/E), can be
derived from the above formula using a debt beta of zero.
(2) Now you need to re-lever the beta (meaning calculating the equity beta
of the company under leverage) using Flashs target debt capitalization
ratio of 18% (D/V). Please assume a debt beta of 0.2 and use the above
same formula for re-levering beta.
(3) You can now calculate Flashs cost of equity using the above equity beta.
(4) Now calculate WACC, using cost of debt of 7.25%.
4. 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? In other words, what is the net present value
of the new product line?
As is stated in the case, net working capital balance of each year should be
calculated as 26.15% of Next Years expected sales.

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