excel calculations solution of a case + 12 Interrogation questions based on a ready case
excel calculations solution of a case + 12 Interrogation questions based on a ready case
Flash Memory Inc.
Student Name
Course Name
Institution
Date
Flash Memory Inc.
Appendices
Introduction……………………………………………………………………3
Projection…………………………………………………………………………4
Quantitative Analysis……………………………………………………….5
New Product Line……………………………………………………………….5
New Product Line with Debt……………………………………………….6
Conclusion…………………………………………………………………………7
Introduction
Since 1990, Flash Memory Inc. has been in the computer and electronic device business. It had a profitable company prior to the year 2000. However, as the electronic device industry got more sophisticated and influential in the modern world, the need for high-quality items grew. Electronic gadgets are also becoming more crucial than ever. As a result, the market for electronic devices attracts increasingly vital firms.
Flash Inc. now competes in a market that is marked by rapid development, significant technical change, shifting consumer requirements, and fierce competition. Flash Inc.’s profit margin is steadily decreasing because of this aspect. They require more net operating working capital, impacting their financial condition and capacity to fund investment opportunities.
Flash Inc. used a note payable backed by receivables to fund this expansion of working capital. The remainder of the note payable, on the other hand, was restricted to 70% of the bank’s receivables. Flash Inc.’s CFO plans to prepare the company’s capital budget and capital budgeting forecast for the next three years in the spring of 2010.
Flash memory Inc. has a promising new product line that has been in development for the past nine months and has already spent $ 0.4 million. This new product line will require $2.2 million in PPE and a contribution of 26.15 percent of sales from net operating working capital.
As the CEO of Flash Memory, Inc., I am responsible for funding the expansion of both the company’s existing product lines as well as all-new investments approved by the board of directors. I recently got a proposal for an extensive product line that was expected to significantly impact the firm’s sales, earnings, and cash flows. However, the firm would have to make significant investments and expenses to execute this new product line. Furthermore, Flash’s notes payable amounts were consistently approaching 70 percent of accounts receivable.
Projections
The company is confronted with three problems. Either make no investment in a new product line, make a debt-financed investment, or issue ordinary shares. Typically, all of the best options are examined, compared, and fitted to the financial accounts. In our excel spreadsheets, we do precisely that. The inputs supplied in the case were used to create three-year forecasts as a pre-condition for decision-making. The marketing manager projected net sales predictions, and the Pro-forma statement is stated to be built based on net sales amount each year, implying that other income statement inputs reflect some type of proportion of net sales, such as research and development expenses, which represent 5% of sales.
When financial managers make projections, they frequently employ an approach that is similar to or identical to vertical analysis. Some exclusions, particularly in operations activities like accounts receivables and payables, need distinct procedures. In that scenario, the firm has a policy that permits customers who purchase a product on credit to pay for it over a period of up to 60 days, thus the days’ receivables are 60. Similarly, account payment is usually postponed, and it can be extended up to 30 days in most circumstances. DSO and DPO are used to determine expected accounts receivables and payables.
The interest expenditure is based on Notes payables, and we utilized Notes payables as an account to offset and equalize assets, liabilities, and equities.
| Year | Notes Payable (In thousands) | Interest Expense (In thousands) |
| 2010 | $14 316 | $ 927 |
| 2011 | $16 924 | $ 1322 |
| 2012 | $13 325 | $ 1566 |
Quantitative Analysis
We need to know the weighted average cost of capital for each firm and how expensive extra funding is in order to explore new investment possibilities and estimate the value of projects. Both loan and stock are used to fund Flash Memory Inc. The cost of debt is predictable given the case facts, but the cost of equity is uncertain and must be estimated. Other variables, such as RF, beta, and market risk premium, must be used to calculate CAPM.
New Product Line
The investment’s net present value must be evaluated to establish whether the new product line will add value to the firm. The Weighted Average Cost of Capital must be determined in order to do so. The cost of equity was calculated at 11.60 percent using a risk-free rate of 4.40 percent, an average beta of 1.2, and a market risk premium of 6%. On the other hand, the debt had a 4 percent interest rate and a prime rate of 3.25 percent, resulting in a debt cost of 7 percent. With a 40% tax rate, the cost of debt after taxes is 4.35 percent. Flash Memory, Inc. has always aimed for a debt-to-value ratio of 18 percent, with an equity-to-value ratio of 82 percent. When all of these figures are added up, WACC equals 10.30 percent.
The next step would be to use WACC to discount the cash flow to see if this new product line will positively value the firm. Exhibit 2 depicts Flash Memory, Inc.’s estimated future cash flow, which includes a gross margin of 21%, selling, general, and administrative expenses of 8% of sales in 2009, and a change in NWC of roughly 26.15 percent of sales. This expenditure was not added back to the incremental gain since depreciation flows through the Cost of Goods Sold. However, NPV may not be the ideal technique for determining whether or not to invest in the new product line because of several unexpected items. To compare it to WACC, the Internal Rate of Return was computed.
The IRR simply expresses the projected growth rate for a project, in this case, the new product line. The firm should explore the new product line since the IRR is larger than the WACC. The next stage is to figure out how to fund this new product line, whether through an equity offering or factoring. To support the operations of the new product line, a total balance of $11 million in 2010, $12.7 million in 2011, and $8.6 million in 2012 are required.
Due to its mix of speed, size, density, reliability, and power consumption, this new product line was thought to give the business a competitive edge in the memory industry’s fastest expanding area. Because Flash Memory, Inc. operates in such a competitive market, expanding their product range is something they should seriously consider. The approach is mainly dependent on Flash Memory, Inc.’s requirements. The cost of borrowing is lower with debt financing since investment banks charge 8%. Flash Memory, Inc. will be able to maintain its leverage ratio low (18 percent debt-to-value) with the stock offering, and debt covenants will not impede the company’s activities.
New Product Line with Debt
The company has two options for financing new projects: debt or issuing stock. We generated modified balance sheets and income statements for both circumstances to examine them. Interest expenditure is the primary difference between those two revenue statements. It is dependent on the decision made by the firm. In the case of a loan, the interest expense would be somewhat more significant. Interest expenditure was calculated using the closing balance of last year’s notes due. Even if income taxes are more important in the case of equity financing, net income is higher if the firm decides to fund its investment by issuing shares. The share price is $25, but the business only earns $23 due to investment banker costs. As a result, 0.069 million is added to the paid-in capital from the previous year in the event of equity financing.
Conclusion
Flash Memory, Inc. should aggressively pursue the new product line since it adds value to the firm. They should also fund it through an equity offering in order to preserve the debt-to-value ratio at 18 percent, which is what they’ve wanted for years. Furthermore, the firm will be free of the debt covenants that are commonly associated with loans, allowing them greater flexibility and independence in their operations.
excel calculations solution of a case + 12 Interrogation questions based on a ready case
Flash Memory Inc.
Student Name
Course Name
Institution
Date
Flash Memory Inc.
Appendices
Introduction……………………………………………………………………3
Projection…………………………………………………………………………4
Quantitative Analysis……………………………………………………….5
New Product Line……………………………………………………………….5
New Product Line with Debt……………………………………………….6
Conclusion…………………………………………………………………………7
Introduction
Since 1990, Flash Memory Inc. has been in the computer and electronic device business. It had a profitable company prior to the year 2000. However, as the electronic device industry got more sophisticated and influential in the modern world, the need for high-quality items grew. Electronic gadgets are also becoming more crucial than ever. As a result, the market for electronic devices attracts increasingly vital firms.
Flash Inc. now competes in a market that is marked by rapid development, significant technical change, shifting consumer requirements, and fierce competition. Flash Inc.’s profit margin is steadily decreasing because of this aspect. They require more net operating working capital, impacting their financial condition and capacity to fund investment opportunities.
Flash Inc. used a note payable backed by receivables to fund this expansion of working capital. The remainder of the note payable, on the other hand, was restricted to 70% of the bank’s receivables. Flash Inc.’s CFO plans to prepare the company’s capital budget and capital budgeting forecast for the next three years in the spring of 2010.
Flash memory Inc. has a promising new product line that has been in development for the past nine months and has already spent $ 0.4 million. This new product line will require $2.2 million in PPE and a contribution of 26.15 percent of sales from net operating working capital.
As the CEO of Flash Memory, Inc., I am responsible for funding the expansion of both the company’s existing product lines as well as all-new investments approved by the board of directors. I recently got a proposal for an extensive product line that was expected to significantly impact the firm’s sales, earnings, and cash flows. However, the firm would have to make significant investments and expenses to execute this new product line. Furthermore, Flash’s notes payable amounts were consistently approaching 70 percent of accounts receivable.
Projections
The company is confronted with three problems. Either make no investment in a new product line, make a debt-financed investment, or issue ordinary shares. Typically, all of the best options are examined, compared, and fitted to the financial accounts. In our excel spreadsheets, we do precisely that. The inputs supplied in the case were used to create three-year forecasts as a pre-condition for decision-making. The marketing manager projected net sales predictions, and the Pro-forma statement is stated to be built based on net sales amount each year, implying that other income statement inputs reflect some type of proportion of net sales, such as research and development expenses, which represent 5% of sales.
When financial managers make projections, they frequently employ an approach that is similar to or identical to vertical analysis. Some exclusions, particularly in operations activities like accounts receivables and payables, need distinct procedures. In that scenario, the firm has a policy that permits customers who purchase a product on credit to pay for it over a period of up to 60 days, thus the days’ receivables are 60. Similarly, account payment is usually postponed, and it can be extended up to 30 days in most circumstances. DSO and DPO are used to determine expected accounts receivables and payables.
The interest expenditure is based on Notes payables, and we utilized Notes payables as an account to offset and equalize assets, liabilities, and equities.
| Year | Notes Payable (In thousands) | Interest Expense (In thousands) |
| 2010 | $14 316 | $ 927 |
| 2011 | $16 924 | $ 1322 |
| 2012 | $13 325 | $ 1566 |
Quantitative Analysis
We need to know the weighted average cost of capital for each firm and how expensive extra funding is in order to explore new investment possibilities and estimate the value of projects. Both loan and stock are used to fund Flash Memory Inc. The cost of debt is predictable given the case facts, but the cost of equity is uncertain and must be estimated. Other variables, such as RF, beta, and market risk premium, must be used to calculate CAPM.
New Product Line
The investment’s net present value must be evaluated to establish whether the new product line will add value to the firm. The Weighted Average Cost of Capital must be determined in order to do so. The cost of equity was calculated at 11.60 percent using a risk-free rate of 4.40 percent, an average beta of 1.2, and a market risk premium of 6%. On the other hand, the debt had a 4 percent interest rate and a prime rate of 3.25 percent, resulting in a debt cost of 7 percent. With a 40% tax rate, the cost of debt after taxes is 4.35 percent. Flash Memory, Inc. has always aimed for a debt-to-value ratio of 18 percent, with an equity-to-value ratio of 82 percent. When all of these figures are added up, WACC equals 10.30 percent.
The next step would be to use WACC to discount the cash flow to see if this new product line will positively value the firm. Exhibit 2 depicts Flash Memory, Inc.’s estimated future cash flow, which includes a gross margin of 21%, selling, general, and administrative expenses of 8% of sales in 2009, and a change in NWC of roughly 26.15 percent of sales. This expenditure was not added back to the incremental gain since depreciation flows through the Cost of Goods Sold. However, NPV may not be the ideal technique for determining whether or not to invest in the new product line because of several unexpected items. To compare it to WACC, the Internal Rate of Return was computed.
The IRR simply expresses the projected growth rate for a project, in this case, the new product line. The firm should explore the new product line since the IRR is larger than the WACC. The next stage is to figure out how to fund this new product line, whether through an equity offering or factoring. To support the operations of the new product line, a total balance of $11 million in 2010, $12.7 million in 2011, and $8.6 million in 2012 are required.
Due to its mix of speed, size, density, reliability, and power consumption, this new product line was thought to give the business a competitive edge in the memory industry’s fastest expanding area. Because Flash Memory, Inc. operates in such a competitive market, expanding their product range is something they should seriously consider. The approach is mainly dependent on Flash Memory, Inc.’s requirements. The cost of borrowing is lower with debt financing since investment banks charge 8%. Flash Memory, Inc. will be able to maintain its leverage ratio low (18 percent debt-to-value) with the stock offering, and debt covenants will not impede the company’s activities.
New Product Line with Debt
The company has two options for financing new projects: debt or issuing stock. We generated modified balance sheets and income statements for both circumstances to examine them. Interest expenditure is the primary difference between those two revenue statements. It is dependent on the decision made by the firm. In the case of a loan, the interest expense would be somewhat more significant. Interest expenditure was calculated using the closing balance of last year’s notes due. Even if income taxes are more important in the case of equity financing, net income is higher if the firm decides to fund its investment by issuing shares. The share price is $25, but the business only earns $23 due to investment banker costs. As a result, 0.069 million is added to the paid-in capital from the previous year in the event of equity financing.
Conclusion
Flash Memory, Inc. should aggressively pursue the new product line since it adds value to the firm. They should also fund it through an equity offering in order to preserve the debt-to-value ratio at 18 percent, which is what they’ve wanted for years. Furthermore, the firm will be free of the debt covenants that are commonly associated with loans, allowing them greater flexibility and independence in their operations.