Flash Memory Inc. Case

CASE 1 – FLASH MEMORY, INC.

l.iannello@student.maastrichtuniversity.nl

Table of Contents

1.        Introduction        

2.        Task 1: Financial Forecasts        

3.        Task 2: Additional Investment Opportunities        

4.        Task 3: Financing Investment Opportunities        

5.        Task 4: Financing Recommendations and Conclusion        

6.        References        

1. Introduction

In the underlying case study, we investigate the financial situation and corresponding financial implications with regards to financing and investment decisions of a US-based small enterprise operating in the computer and electronic device memory market. Due to the competitive and fast growing market conditions, and prevailingly limited financing opportunities at hand, which are due to the lack of public equity of the company, the management considers various financing decisions to further allow expenditures in R&D, a field which is considered a comparative advantage and highly correlated with the good reputation of Flash Memory, Inc.

In the course of the paper, we utilize the actual financial statements for the fiscal years 2007, 2008, and 2009, as well as the key forecasting assumptions for 2010, 2011, and 2012 in order to forecast income statements and balance sheets for these fiscal years.

Moreover, we elaborate external financing requirements through additional notes payable as well as other forms of financing through further investments in a new product line in order to improve the cash inflow situation. Additionally, we consider another form of financing through equity issuance in order to compare alternative opportunities. Finally, we compare the abovementioned investment opportunities and conclude by taking into account the implied costs and benefits for each of the three alternatives.

We find that when accounting for financing decisions with different origins, financing through equity and share issuance is regarded more costly than financing through debt, while debt issuance is limited to economic situations in which Flash Memory, Inc. is considered balanced in terms of capital structure.

1. Task 1: Financial Forecasts

1. Forecasted Income Statement

Taking into account the previous fiscal years’ performance, as well as the income projection for the three upcoming years, we estimate the income statement for the years 2010 to 2012 (exhibit 1).

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Exhibit 1 – Forecasted Income Statement

We forecast a positive development of sales figures due to constant and optimistic estimations of sales rates in the next years. Therefore, we assume stable sales rates for the years 2011 and 2012, respectively, since an estimation of the fast-living sector well in advance is unlikely to be highly precise. In order to estimate the gross margin, we assume stable rates for cost of goods sold by taking into account the previous years’ gross margin, oriented at the corresponding sales figure, and multiplying it by the current period’s sales level. Following this, we find stable gross margins for all three projected time periods.

Since Research & Development (R&D) is considered one of Flash Memory, Inc.’s greatest comparative advantages, we realize a five percent rate of the total sales. Consequently, due to the increasing sales level, we find an improving operating profit, which increases by 61% between 2009 and 2012. Since Flash Memory, Inc. is expected to further exercise external financing through Notes Payable, we expect increasing interest rates, which conversely lower the level of net income, but allow to more efficiently use capital to boost sales rates.