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%
Income Statement ($000s except EPS)
Actual

Forecast (not investing)

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)

$1,303
($50)

$1,389
($50)

$994
($50)

Income before income taxes

$3,773

$223

$4,182

$5,295

$6,538

$6,933

Income taxes
Net income

$1,509
$2,264

$89
$134

$1,673
$2,509

$2,118
$3,177

$2,615
$3,923

$2,773
$4,160

$1.52

$0.09

$1.68

$0.21

$0.26

$0.28

8.55%

9.31%

8.36%

8.36%

8.36%

8.36%

40%

40%

40%

40%

40%

40%

Links
Sales
Cost of goods sold
Gross margin
Research and development
Selling, general and administrative
Operating income
Interest expense
Other income (expenses)

Earnings Per Share

SG&A/Sales
Interest Rate on Debt
Tax Rate from Note a Exh. 1

Growth Projections on page 3

81.1% COGS as % of Sales

5.0% R & D as % of Sales

8.36% SG & A as a % of Sales

Rate of Notes Payable

(50) A constant

40% Tax Rate from Note a Exh. 1

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

$6,549
$2,179
$4,370

$7,449
$2,738
$4,711

$8,349
$3,364
$4,985

$27,939

$31,420

$35,120

$42,401

$50,348

$50,622

Accounts payable
Notes payable
Accrued expenses
Income taxes payable
Other current liabilities
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
$14,082
$876
$138
$744
$20,639

$5,759
$15,018
$1,051
$305
$893
$23,026

$5,759
$10,750
$1,051
$304
$893
$18,757

Common stock at $0.01 per share par value

Paid in capital in excess of par value
Retained earnings
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
$13,767
$21,762

$15
$7,980
$19,327
$27,322

$15
$7,980
$23,870
$31,865

Total liabilities & shareholders' equity

$27,939

$31,420

$35,120

$42,401

$50,348

$50,622

Cash
Accounts receivable
Inventories
Prepaid expenses
Total current assets
Property, plant & equipment at cost
Less: Accumulated depreciation
Net property, plant & equipment
Total assets

Number of shares outstanding

1,491,662 1,491,662 1,491,662

3.3%
60
52
0.4%

Cash as % of Sales
Accts. Rec.Based Upon 60 DSO
Inventory Based upon 52 Days
Prepaid Expenses as a % of Sales

Capital Expenditures
Depreciation Expenses for Accum. Depr.

60.0% Accounts Payable as % of 30 Days of Purchases

0.73% Accured Expenses
10.0% Income Taxes Payable
0.62% Other current liabilities

1,491,662 1,491,662 1,491,662

Book Value Per Share

$11.43

$11.52

$13.20

$14.59

$18.32

$21.36

Notes payable / accounts receivable

60.2%

69.0%

69.1%

71.4%

63.4%

45.4%

253370144.xlsx.ms_office

1)

Assuming the company does not invest in the new product line, prepare forecasted income statements and balan

A)

As it is clear from financial statements Note Payable/ Account receivable for year 2010 exceeded 70%. The bank w

2)

What course of action do you recommend regarding the proposed investment in the new product line? Should th

a)

IRR and NPV of the investment opportunity ($000):IRR: (-0.4)+(-2.2)+(-0.3)+(21%-8.4%)(21.6)+[(21%-8.4%)(28)/(1+

Cost

New Plant and Equip Cost (000's)

Cost for taking product from concept stage (000's)
Cost for advertising and promotion campaign (000's)

(in 000's)
Sales
Gross Margin
SG&A Expenses
Net Profit

2011
21600
4536
1814.4
19785.6

2200
400
300
2012
28000
5880
2352
25648

2013
28000
5880
2352
25648

Discount Rate: 6%
NPV: IRR:-

75996.24798
(-400)+(-2200)+(-300)+19785.6+25648/(1+r)+25648/(1+r)^2+10076/(1+r)^3+ 4580/(1+r)^4=0
26%

From the calculation we can see the Net Present Value is 7.6 million which is greater than 0, and the IRR is 26% w
4)

As CFO Hathaway Browne, what financing alternative would you recommend to the Board of Directors to meet th

a)

The way to finance the investment, a private sale of common stock is an ideal way to release tithed cash flow. In th

me statements and balance sheets at year-end 2010, 2011, and 2012. Based on these forecasts, estimate Flashs required external financ

xceeded 70%. The bank was only willing to lend uptil 70%. Hence Flash Memory Inc need to find alternate method of financing.

w product line? Should the company accept or reject this investment opportunity?

21.6)+[(21%-8.4%)(28)/(1+r)]+[(21%-8.4%)(28)/(1+r)^2]+ [(21%-8.4%)(11)/(1+r)^3]+ [(21%-8.4%)(5)/(1+r)^4]=0For r = 26%NPV= (-0.4)+(-2.

2014
11000
2310
924
10076

2015
5000
1050
420
4580

21%
8.40%

+ 4580/(1+r)^4=0

n 0, and the IRR is 26% which is a quite high rate, so the Flash Memory should take the investment.

rd of Directors to meet the financing needs you estimated in questions a) through c) above? What are the costs and benefits of each alter

ease tithed cash flow. In this case, the Flash Memory can get 300,000shares @ $25 per share less investment bankers fee and other expen

e Flashs required external financing. In this case all required external financing takes the form of additional notes payable from its comm

ate method of financing.

)^4]=0For r = 26%NPV= (-0.4)+(-2.2)+(-0.3)+(21%-8.4%)(21.6)+[(21%-8.4%)(28)/(1+6%)]+[(21%-8.4%)(28)/(1+6%)^2]+ [(21%-8.4%)(11)/(1+

he costs and benefits of each alternative?

ment bankers fee and other expenses associated with negotiating. The company can raise 6,900,000 dollars. This also can help the compa

onal notes payable from its commercial bank

)/(1+6%)^2]+ [(21%-8.4%)(11)/(1+6%)^3]+ [(21%-8.4%)(5)/(1+6%)^4]= 8 > 0

lars. This also can help the company to payback the bank debt in order to achieve their goal of keeping the debt-to-capital ratio of 18%.

On

he debt-to-capital ratio of 18%.

On the other hand, if the company cannot sell the common stock successfully, the only way will be asking

sfully, the only way will be asking for more loans from bank. According to NPV system, it does not matter how the company raise fund to d

r how the company raise fund to do the investment. The NPV value keeps at the same either sell common stock or get loan from commerc

n stock or get loan from commercial bank. Nevertheless, borrowing money from bank to invest increases the risk of tightening the cash flo

s the risk of tightening the cash flow to the company. Besides, it increases the cost of investing the project because the company has alrea

ct because the company has already reach the warning ratio of 70% notes payable over face value of receivable. T

c)

How does your recommendation from question b) above impact your estimate of the companys forecasted
How do these forecasted income statements and balance sheets differ if the company relies solely on addit
2010

Sales
Cost of goods sold (includes equipment depreciation)
R&D
SGA
Increase in operating income
Cash (3.3% of sales)
AR (60 DSO)
Inventories (52 days of COGS)
Prepaid expenses (0.4% of sales)
NetPPE

$
$
$
$
$

713
3,551
2,431
86
2,200

AP (30 days of purchases)(purchases=60%cogs)

Accrued expenses (0.73% of sales)
Other current liabilities (0.62% of sales)

$
$
$

842
158
134

5,648

the companys forecasted income statements and balance sheets, and required external financing in 2010, 2011, and 2012?
pany relies solely on additional notes payable from its commercial bank, compared to a sale of new equity?

$
$
$
$
$

2011
21,600
17,064
2,106
2,430

$
$
$
$
$

2012
28,000
22,120
2,341
3,539

$
$
$
$
$

924
4,603
3,151
112
1,760

$
$
$
$
$

924
4,603
3,151
112
1,320

$
$
$

1,091
204
174

$
$
$

1,091
204
174

7,321

7,321

2013
$ 28,000
$ 22,120

11, and 2012?