Fin 423 - Flash Memory

William Blum

Professor Haddad

Fin 423

30 May 2018

Flash Memory

        With the rising rates in sales in the beginning of 2010, additional working capital is needed to maintain growth and keep up the business. Flash Memory, however, is reaching its notes payable limit with their current bank and needs to search for alternate financing. These new funds that would be coming in would be needed to finance its forecasted sales for the next 3 years. With the new plan for financing, Flash will have a better grasp of what it’s financial position will look like for the following 3 years through the use of a pro-forma income statement. According to the sales projections, $4.02 million and $2.59 million are required for the years 2010 and 2011. Furthermore, there is a new product line that is being considered for investment and through the use of a valuation analysis we will be able to determine whether or not it is a sustainable product.

According to the analysis, the NPV of the new project came out to be a positive number close to $3 million if we use the weighted average cost of capital for the discount rate. Given this, his Internal Rate of Return would then be calculated in order to determine if the return on investment were in fact high enough to satisfy the required return. This takes into account the discounted cash flows and therefore is the most accurate capital budgeting method considering it takes into account both risk and time variables. If the new project was to be invested in (which it should be), the additional financing required for the project in 2010 would be around $7.45 million.

There are a few different financing methods that can be used to make up the additional financing needed for the projects. These include: Internal financing, short term debt, long term debt, and equity issuance. They should choose the best financing options according to the pecking order theory which states that the cost of financing increases with the increase in the asymmetric information. Short term debt from the factoring division will be the cheapest way to raise additional funds to help pay for the new project. They will loan up to 90% of the total accounts receivable account of the company versus the 70% limit the commercial bank was willing to loan. Internal financing with the cash at hand and other liquid assets could work for a small amount of time but is not the most sustainable way to fund projects, especially considering most products experience heavily reduced sale after 4 years. Raising more funds through equity financing is typically the last source of additional financing because when new stock is issued, investors think the firm is overvalued and managers are taking advantage of this. As a result, the investors will place a lower value on newly issued equity.