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Flash Memory Statement

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Veso Ojiambo
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19 views

Flash Memory Statement

Uploaded by

Veso Ojiambo
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Introduction

I stand before you today to address a critical decision that Flash Memory is currently facing. My

discussion will center around the strategic direction of the company. My role here is to provide

an extensive analysis of the available options and their financial implications, enabling you, the

esteemed board members, to make an informed decision that aligns with our long-term goals.

Context

Flash Memory is renowned for its expertise in the production and design of Solid State Drives

(SSDs), a segment that constitutes a significant 80% of the company total revenue. However, the

SSD market presents a unique challenge due to its susceptibility to rapid technological

advancements by competitors, resulting in a short shelf life for these products. This places a

significant demand on our resources, as we continuously invest substantial capital in research

and development to stay competitive. Despite these efforts, the product's market relevance

remains limited.

Financial Challenge

To support our current production model, we have been relying on bank loans and factoring a

substantial 90% of our accounts receivables. It is essential to highlight that, should our bank

notes payable approach the 70% limit, our bank will no longer be able to sustain our operational

costs within the constraints of the existing loan agreement.

New Product Line

In light of these challenges, we are now considering the possibility of diversifying into a new

product line. This expansion brings forth several crucial questions, primarily pertaining to the
financing of the substantial investments and expenditures required. Diversification into a new

product line offers the potential to mitigate the risks associated with the volatile SSD market

while tapping into new revenue streams.

Financing Options

We have identified three potential options to finance this project

Option 1: Additional Factoring Group Funding

Option 2: Sale of Common Stock

Option 3: Internal Reinvestment

Option 1: Additional Factoring Group Funding

The first option involves securing additional funding from the factoring division of Flash's

commercial bank. This option leverages our existing relationship with the bank and may offer

competitive terms.

Option 2: Sale of Common Stock

The second option encompasses selling 300,000 shares of common stock at a price of $23.00 per

share. This method allows us to raise capital from the market, potentially attracting new

investors, but also diluting existing ownership.

Option 3: Internal Reinvestment

The third and final option involves relying solely on internal reinvestments from the company's

earnings. This approach retains full ownership but may limit the pace of our expansion due to

financial constraints.
Financial Analysis

To facilitate your decision-making process, we will conduct an in-depth financial analysis of

these options. This analysis will encompass the projection of detailed income statements and

balance sheets for the years 2010, 2011, and 2012. We will base these forecasts on the key

assumptions provided in exhibit 3, tailored to the respective funding source. This will include a

detailed breakdown of revenue, expenses, and cash flow projections for each option.

Calculating WACC

To evaluate the financial feasibility of each option, we will calculate the Weighted Average Cost

of Capital (WACC) in a more comprehensive manner. This critical metric necessitates the

determination of the cost of debt and the cost of equity, including a detailed explanation of the

underlying components such as risk-free rates, credit spreads, and market rates of return.

WACC = (E/V * Re) + ((D/V * Rd) * (1 - T))

Where:

 E represents the market value of the firm's equity.

 D stands for the market value of the firm's debt.

 V is the sum of equity and debt.

 Re signifies the required rate of return.

 Rd denotes the cost of debt.

 T signifies the tax rate.

Net Present Value (NPV)


Furthermore, the Net Present Value (NPV) of the investment will play a significant role in our

analysis. NPV aids in assessing the potential return on investment, taking into account detailed

cash flows, discount rates, and the timing of these cash flows.

NPV = R / (1 + i)^t

Where:

 R represents the net cash flow.

 i is the discount rate.

 t denotes the time of the cash flow.

Decision Criteria

Ultimately, our decision will be based on a comprehensive comparison of each option's impact

on earnings per share, return on equity, interest coverage ratio, and notes payable for the coming

years. Additionally, we will explore the implications of each option on our balance sheet, debt-

to-equity ratios, and overall financial health.

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