Flash Memory, Inc.

Actual and Forecasted Financial Statements Assuming No Investment in New Product Line, No Sale of New
Common Stock, and All Borrowings at 9.25%

Actual

Forecast

2007

2008

2009

2010

2011

2012

$77,131
$62,519
$14,612

$80,953
$68,382
$12,571

$89,250
$72,424
$16,826

$120,000
$97,320
$22,680

$144,000
$116,784
$27,216

$144,000
$116,784
$27,216

$3,726
$6,594
$4,292

$4,133
$7,536
$902

$4,416
$7,458
$4,952

$6,000
$10,032
$6,648

$7,200
$12,038
$7,978

$7,200
$12,038
$7,978

$480
-$39

$652
-$27

$735
-$35

$937
-$50

$1,323
-$50

$1,565
-$50

Income before income taxes

$3,773

$223

$4,182

$5,661

$6,604

$6,363

Income taxes @40%

Net income

$1,509
$2,264

$89
$134

$1,673
$2,509

$2,264
$3,396

$2,642
$3,963

$2,545
$3,818

$1.52

$0.09

$1.68

$2.28

$2.66

$2.56

Sales ( given)
Cost of goods sold=sales*.811
Gross margin
Research and development=Sales*.05
Selling, general and administrative=sales*.0836
Operating income
Interest expense=pre years notes payable*.0925
Other income (expenses)-Given

Earnings per share =net income/no of shares o/s

Exhibit TN-1 (continued)

Balance Sheet ($000s except shares outstanding and book value per share)
Actual

Forecast

2007

2008

2009

2010

2011

2012

$2,536
$10,988
$9,592
$309
$23,425

$2,218
$12,864
$11,072
$324
$26,478

$2,934
$14,671
$11,509
$357
$29,471

$3,960
$19,726
$13,865
$480
$38,031

$4,752
$23,671
$16,638
$576
$45,637

$4,752
$23,671
$16,638
$576
$45,637

$5,306
$792
$4,514

$6,116
$1,174
$4,942

$7,282
$1,633
$5,649

$8,182
$2,179
$6,003

$9,082
$2,793
$6,290

$9,982
$3,474
$6,508

$27,939

$31,420

$35,120

$44,034

$51,926

$52,145

Accounts payable=COGS*.6*30/365
Notes payable
Accrued expenses=Sales*.0073
Income taxes payable=Income tax*.1
Other current liabilities=Sales*.0062
Total current liabilities

$3,084
$6,620
$563
$151
$478
$10,896

$4,268
$8,873
$591
$9
$502
$14,243

$3,929
$10,132
$652
$167
$554
$15,434

$4,799
$14,306
$876
$226
$744
$20,952

$5,759
$16,914
$1,051
$264
$893
$24,881

$5,759
$13,324
$1,051
$255
$893
$21,282

Common stock at $0.01 per share par value

Paid in capital in excess of par value
Retained earnings (retained earnings pre yr+cu year net income)
Total shareholders' equity

$15
$7,980
$9,048
$17,043

$15
$7,980
$9,182
$17,177

$15
$7,980
$11,691
$19,686

$15
$7,980
$15,087
$23,082

$15
$7,980
$19,050
$27,045

$15
$7,980
$22,868
$30,863

Total liabilities & shareholders' equity

$27,939

$31,420

$35,120

$44,034

$51,926

$52,145

Number of shares outstanding(given)

1,491,662

1,491,662

1,491,662

1,491,662

1,491,662

1,491,662

Book value per share=Sh equity/(shares o/s *1000)

$11.43

$11.52

$13.20

$15.47

$18.13

$20.69

Return on equity =(net income/sh equity)*100

Interest coverage ratio (times)=Op income/int
Notes payable / accounts receivable
Notes payable / shareholders' equity
Total outside liabilities / shareholders' equity

13.3%
8.9
60.2%
38.8%
63.9%

0.8%
1.4
69.0%
51.7%
82.9%

12.7%
6.7
69.1%
51.5%
78.4%

14.7%
7.1
72.5%
62.0%
90.8%

14.7%
6.0
71.5%
62.5%
92.0%

12.4%
5.1
56.3%
43.2%
69.0%

Cash=Sales*.033
Accounts receivable=Sales*60/365
Inventories=COGS*52/365
Prepaid expenses=Sales*.004
Total current assets
Property, plant & equipment at cost ( pre year value+900)
Less: Accumulated depreciation (accu dep+pre year pl value*.075)
Net property, plant & equipment
Total assets

Flash Memory, Inc.

Calculation of Cost of Capital
Step 1 - To calculate Asset beta

Micron Technology
Book value of equity = Sh o/s *B.V of share
Book value of debt=B.V of equity*.33/.67
Market value of equity=shares o/s*M.V
D/V
E/V
D = debt beta(Assumed)
E = equity or levered beta(Given)
A = asset or unlevered beta =A = D x (D/V) + E x (E/V)
SanDisk Corporation
Book value of equity = Sh o/s *B.V of share
Book value of debt=B.V of equity*.33/.67
Market value of equity=shares o/s*M.V
D/V
E/V
D = debt beta(Assumed)
E = equity or levered beta(Given)
A = asset or unlevered beta =A = D x (D/V) + E x (E/V)

0.20
1.25
0.00

0.20
1.36
-

STEC, Inc.
Book value of equity = Sh o/s *B.V of share
Book value of debt=B.V of equity*.33/.67
Market value of equity=shares o/s*M.V
D/V
E/V
D = debt beta(Assumed)
E = equity or levered beta(Given)
A = asset or unlevered beta =A = D x (D/V) + E x (E/V)
Average beta of the industry
Calculation of Cost of Capital

0
1

0.00

Step 2 - Calculation of cost of equity capital for Flash Memory, Inc.:

A = D x (D/V) + E x (E/V), where E = market value of equity and D = 0.2

Flash Memory, Inc.

D = target value of debt

E = target value of equity
D = debt beta
A = average asset beta for the industry
E = equity or levered beta=(A- D*D/V)/E/V

18.0%
82.0%
0.20

Cost of equity capital for Flash

Ke = Rf + E x Market Risk Premium
Rf = risk-free rate of return
E = Flash's equity or levered beta
Assumed market risk premium
Ke = Flash's cost of equity capital=Rf + E x Market Risk Premium

3.70%
0.00
6.00%

Step 3 - Calculation of cost of capital for Flash Memory, Inc.:

K = D/Vd x Kd x (1 - T) + E/V x Ke
We
Wd
Kd
income tax rate
Ke = Flash' cost of equity capital
K = D/Vd x Kd x (1 - T) + E/V x Ke

0.82
0.18
7.25%
40.00%

sd
1.36
1.14074
1.19221
1.05236
1.13171
1.19096

mc
1.25
1.29552
0.96486

0.18
0.82

Flash Memory, Inc.

Net Present Value of Investment in New Product Line ($000s)
2010

2011

2012

2013

2014

2015

$7,322

$7,322

$2,877

$1,308

$0

$21,600

$28,000

$28,000

$11,000

$5,000

$0

$0

$0

$0

$0

$300

$0

$0

$0

$0

Net income
Depreciation of equipment=Cost of equip/5

$0

$0

$0

$0

$0

Cash flow from operations

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

Investment in equipment (Given)

-$2,200

Net working capital required to support sales= Next years Sales*.2615$5,648

Investment in net working capital (the year-on-year change)
Sales (Given)
Cost of goods sold (includes equipment depreciation)=Sales*.79
Research & development
Selling, general & administrative=Sales*.0836
Launch promotion
Income before income taxes
Income taxes@40%

Total cash flow=Invest+w.c diff+op cash flows

NPV @ 10.05% cost of capital
IRR

-$2,200

Total