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, …show more content…
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 Flash’s 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 Flash’s 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
Star Appliance is looking to expand their product line and is considering three different projects: dishwashers, garbage disposals, and trash compactors. We want to determine which project would be worth doing by determining if they will add value to Star. Thus, the project(s) that will add the most value to Star Appliance will be worth pursuing. The current hurdle rate of 10% should be re-evaluated by finding the weighted average cost of capital (WACC). Then by forecasting the cash flows of each project and discounting them by the WACC to find the net present value, or by solving for the internal rate of return, we should be able to see which projects Star should undertake.
The case stated that the purchases were forecast to be $2.7 million. Since level production would require equal purchases for each month, we divided total purchased by 12 months to determine the monthly accounts payable. Next, we added the accounts payable, notes payable, interest payable, accrued taxes, long-term debt, and shareholder's equity. This summation gives us the total liabilities and equity.
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 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.
This is with the understanding that our new product is classified as a Star (high growth, high share business or products. They need heavy investments to finance their rapid growth. Eventually their growth will slow down and they will turn into cash cows. Chapter 2) on the Growth Share Matrix (A portfolio-planning method that evaluates a company’s SBUs in terms of market growth rate and relative market share. Chapter 2). Initially, in the introduction stage (The PLC stage in which a new product is first distributed and made available for purchase. Chapter 9) Anchor Alert will require larger amounts of funding to support the initial start-up fees, product productions, and building the early marketing, which will eat into initial
Mr. Hathaway Browne, CFO of Flash Memory Inc. MP.JAW Consultants October 11, 2010 Analysis of the Investment Opportunity and Financing Options
Returns: The company will plan to repay its loans after 5 years, which would give it enough time to assess its growth and gather profits from the computers that it sells. This initial revenue would cover building rent costs, equipment, wages, interests, and all the factors necessary for starting this company. Once the loans have been repaid, the ongoing expenses left will be for wages, maintenance, and
Flash memory was founded in San Jose, California in the late 1990s. In 2010, there
CASE QUESTIONS Cash Flows and Value. Cost of Capital Case 1: Hop-In Food Stores, Inc. 1. Determine the correct price for this particular IPO. Use several methods to do this and compare them. 2. What extra information would you try to acquire in a real life situation? Case 2: Chem-Cal Corporation 1. How do you calculate the WACC for this firm? 2. What is the cost of capital of the debt, preferred stock, and common stock (assume the equity beta is 1.22)? 3. Calculate the WACC. How can a WACC be used? 4. Which projects should be selected? (State your assumptions) 5. How should the projects be financed? Analyze all other issues in the case. Case 3: Marriot Corporation 1. What is the Weighted Average Cost of Capital for Marriott Corporation? 2.
The course project involved developing a great depth of knowledge in analyzing capital structure, theories behind it, and its risks and issues. Before I began this assignment, I knew nothing but a few things about capital structure from previous unit weeks; however, it was not until this course’s final project that came along with opening
In order for a firm to move into their future, a firm must have knowledge of its operation for quality level function. Knowledge is a gained through the utilization to financial documents from a corporate controller or account manager. Corporate controller’s have the skills and knowledge to empower a firm’s organizational structure by introducing innovation using a financial analysis to boost sales. The company ABC has step into the future by reconstructing organizational cost with a new product meshed with current ABC employees and manufacturing facilities. ABC is a company that specializes in cedar roofing and siding shingles. ABC plans to use shingle scrap materials to manufacture cedar dollhouses as an opportunity cost to their internal operations. The following article is preview of ABC’s financial structure in 2001 through 2002 using a direct cash flow method for sound decisions of how productivity with a new cedar dollhouses will affect the firm’s operation.
In this lab, you will demonstrate the ability to work with decimal and hexadecimal numbers.
Net present value, internal rate of return, and profitability index are measures used to compare two mutually exclusive capital investment proposals. "SAI wants to increase market share and keep up with technology, which can be done by either expanding their existing Digital Imaging market share or by entering the Wireless Communication market," (UoP, 2007). Both alternatives have areas of opportunity as well as potential risks that the company will have to consider. This paper will analyze the investment risk decisions SAI currently faces with the objectives of increasing its market share and keeping pace with technology.
Implementing cash management strategies can initiate immense ways to maximize cash flow in a firm. Assessing the current firm’s cash position and evaluating proper investment account options can assist a firm properly in accurately assessing and making fairly reliable predictions at maintaining expenses. Important tools are utilized when describing business performance and financial calculations to meet the expected objectives the firm.
Finance: How the business will fund its start-up costs. Cash flow projections, breakeven analysis and budgets.