Flash Memory

Inc.

Abhinandan Singh (MP15003)

FM ASSIGNMENT

Financial Management II

Executive Summary
Flash Memory is a small firm that operates in the computer and electronic device
memory market. It specializes in the design and manufacture of SSDs and
memory module and sold it to original equipment manufacturers (OEMs),
distributors and retailers.
Industry statistics illustrated that the SSD market expanded from about $400
million in 2007 to $1.1 billion in 2009, and it was further forecasted to grow to
$2.8 billion in 2011 and $5.3 billion in 2013. Flash memory component has been
the major source of revenue for the company to the tune of 80%. Other 20% of
its revenue came from other high performance electronic components sold
through the same channels, for the same end products. Being in an electronics
market where technologies changed quite often the product life cycle was also
very less. Most of the revenue generated by a product was in the first 3 years
and after 5th year the product became obsolete.
As a company it used to invest heavily on research and development to stay
ahead of the competition. The working capital requirement was generally fulfilled
by Notes payable obtained from companys commercial bank which were
secured by accounts receivables. However recent times had seen reaching the
70% limit that bank had agreed upon and the CFO Hathaway Browne was
thinking of alternative for additional financing to fulfil working capital
requirements.
Some of the alternative identified were financing through factoring group, sale of
common stock and also the internal financing option of reinvestment of flashs
earnings to fund growth. The CFO had to take a decision on the financing
decision that is to be taken and we will be doing analysis of the same in
subsequent sections.

Problem Identification
The company was considering expanding its business operation through a
new product line which required huge investments and expenditures by
the company. At the same time the company had reached its limit of 70%
to extend credit by the commercial bank which had been financing its
investing activities all these years. The CFO had to choose an alternative
financing strategy out of many options available.
Browne also had to give a decision on the proposal on the new product
line as the decision will have a huge bearing on the companys revenue
and working capital which has not been satisfactory in recent past. But as
the investment opportunity had the potential to be extremely profitable it
looked a lucrative option.
These are the two major problems identified in the case and financial
analysis is needed to arrive at a solution whether to invest or not.

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Financial Management II

Financial Analysis

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Financial Management II

From the Income statement analysis we can infer that investment in new product
line can increase the Sales, Operating Income as well as Net Income from 20% in
2011 to 38% for the same period. Also earnings per share has also increased.
Thus investing in the product line looks a good option from Income statement
analysis.

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Financial Management II

From the Balance Sheet Analysis we also find that the current assets will increase
after investing on new product line. So it also suggest S to invest on new product
line

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Financial Management II

Free Cash Flow Analysis

Debt/Capital Ratio
(D/V)
Equity/Capital Ratio
(E/V)
Debt/Equity Ratio
(D/E)
Beta(debt)
Beta(Assets)
Beta(Equity)
WACC for
Flash
Memory
Risk Free Rate
Market Premium
Expected Return on
Equity
Rate on Debt
WACC

0.18
0.82
0.22
0.2
1
1.175
6

3.70%
6.00%
10.75
%
9.25%
9.82%

Beta(Equity) = [Beta(Assets) - Beta(debt)*D/V]*V/E

= ((1-0.2*0.18)/0.82)

WACC = rd (1-T)*D/V +re*E/V = 0.0925*0.6*0.18+1.1756/0.82 =0.0982

From the above Cash Flow analysis and Net Present Value, we find that Cash flow
comes out to be positive for the project. Also NPV Net present Value) of the
project is positive so we can go for new product line.
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Financial Management II

Conclusion

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