Flash Memory. Inc. faces stiff competition in an industry that maintains concentrate on new development and is challenged with ‘short merchandise life cycles’ ( Pg. 2 ) . Their hereafter will be predicated on how they invest their hard currency flows and bring forth new concern. This procedure will affect bring forthing new funding and developing renovated merchandise lines.
Flash Memory. Inc. specializes in the production of Solid State Drives ( SSD ) which makes up 80 % of their gross. The staying 20 % is comprised of high end/ high public presentation engineering merchandises that are distributed and purchased through the same avenues as their SSDs.
Specific investings have been made by Flash to turn their SSD production due to an addition in market demand. In fact. gross revenues gross for SSDs has increased from 400Million to 5. 3Billion over a 6-year period within the industry. Flash is good known for their production of this engineering and as economic conditions have improved since early 2010 they have seen a big and rapid addition in gross revenues.
Despite this rapid addition in gross revenues. a demand for funding is go forthing Flash with some difficult picks to do. The CFO Hathaway Browne wants analyze the fiscal options that are unfastened to Flash and find what the best option for the company is. This determination is made hard since there are many big participants in this market and a possible for others to spread out their production is lifting. With an unsteady gait of growing. another rival come ining the market could greatly decrease the already sporadic gross revenues that Flash is presently sing. The company has three options when sing financing their prospective merchandise line. They can publish common stock that would bring forth an addition of $ 6. 9 million dollars. Obtain extra support through their factorization group.
Or they can extinguish any new outside investings and utilize their current net incomes to finance the attempt. We will interrupt down the best options that Flash Memory. Inc. has in respects to funding and explicate how we determined these solutions were the most advantageous. We have gained utile penetration into the fiscal planning and investing demands of this house. Required funding for possible production is found within the Forecast Income Statement check and Forecast Balance Sheet check attached to this papers. By utilizing the Net Gross saless as a barometer of the wellness of the house we can bring on the necessity for funding. For case. in 2011 the Cash that was generated through gross revenues amounted to $ 4. 752. 000 dollars.
This sum of hard currency is over double the sum generated in 2008. While this is a clear mark that the concern is turning and healthy. you can deduce from this big addition in hard currency flow that a important addition in demand has occurred within the market or a Flash Memory. Inc. pick to spread out their production capablenesss and or their merchandise. While we know in this case that the company is set to spread out. these basic premises cab be made anterior to using any other information provided in the instance survey.
Once we dissected the information that was provided to us and forecasted the hereafter projections. we applied two premises to the prediction that we believe were good options for Flash Memory. Those premises are that: 1. Investing would be made into the new merchandise line and that there would be no issue of new stock. This would be accompanied with a program to borrow the financess at a rate of 9. 25 % . 2. Investing would be made into the new merchandise line and an issue of 300 1000 stocks would be issued. This would be accompanied with a program to borrow the financess at a rate of 7. 25 % .
If you look at the charts located with our prediction fond regards you will see that in mention to our first premise of an investing of 9. 25 % the net gross revenues were increased by $ 44 million dollars. This addition resulted in an EPS of $ 3. 98 versus the $ 2. 56 that would hold been experienced through continued production without any new production or investing. An addition of that size in EPS ( when applied to the figure of portions outstanding ) would number $ 5. 936. 814. 76 dollars. EPS is a direct representation of the sum of money made by the house during the rating period. This EPS is a true representation of the sum of net incomes because there was no sum borrowed by the company through this first premise.
Tax return on Equity within 2012 was besides observed to hold increased to about 7 % above the industry norm for consumer electronics equipment. The first premise will necessitate Flash Memory. Inc. to take on the highest sum of external debt in order to travel frontward with their prospective undertaking. This addition in liabilities is shown through a significantly big sum of Current Liabilities when compared to our 2nd option for funding. With more than a $ 7 million dollar addition in Current Liabilities. this sum of outstanding debt may do it hard for them to finance productions in the hereafter if their production line does non bring forth the gross that they anticipate. A high Tax return on Equity would be the consequence of this more aggressive method of funding with 17. 2 % being the sum for the first scenario in 2012 and 14. 6 % being the sum for the 2nd scenario in 2012. The EPS for our 2nd scenario was non every bit high in the twelvemonth 2012. but it does expose a higher book value due to the 300. 000 stocks issued during that clip period with $ 23. 46 Book Value Per Share.
Equally far as the Income Statement is concerned. this option does non look the most advantageous toward the topmost end of making higher net incomes and hard currency flows for investors. This 2nd option of puting at 7. 25 % and publishing 300. 000 stocks will non make the largest returns. but it will systematically bring forth higher gross through the production line and keep a safe distance from a higher Debt/Equity ratio. If the production line does non hike Gross saless the manner that it is expected excessively. so this 2nd scenario would let for the company to retrieve more rapidly without big outstanding external funding. We believe that the Flash memory should accept the investing chance based on the deliberate NPV. As shown in the above computations. the NPV from forecasted statements is $ 2. 969. It is recommended to see undertakings with positive NPV because the return from puting in the undertaking would be higher than the cost of financing it. The larger the NPV. the more fiscal value the undertaking will add to the Flash memory.
On the impudent side. it is clear that a undertaking will veto NPV will non add value to the company and hence. the undertaking with negative NPV should be rejected. As noted in the prediction statements for Flash thrust. the company can anticipate a important hard currency flow if it accepts the new undertaking ensuing in a positive important net income. The new merchandise will bring forth about $ 21. 6 million in 2011 and $ 28 million in 2012 and 2013. followed by $ 11 million in 2014 and $ 5 million in 2015. This means that the new merchandise will convey in higher gross revenues in the beginning followed by a diminution in the back-to-back old ages because of the short merchandise life rhythms. However. the company believes that the new merchandise is superior to bing memory merchandises. therefore the net income borders over the life of rhythm is expected to be 21 % . which is another good ground to take up the undertaking.
If this merchandise is good received by the clients. it has a possible to add great value to the company in footings by bring forthing extra hard currency flows. which in bend will make enormous value to the bing stockholders and the company. As stated antecedently in this analysis. an aggressive degree of outside funding will make much more external debt than if stock issue were pursued more proactively. The inability to cognize how this merchandise will existent sell leaves Flash Memory. Inc. with a higher degree of uncertainness than we would prefer. While the higher degree of external funding should bring forth a higher EPS for the company it will besides make a really high Debt to Equity ratio. which will do it really of import to make their addition Gross saless ends in order to pay off their Current Liabilitiess.
As CFO Hathaway Browne. what funding option would you urge to the board of managers to run into the funding needs you estimated in inquiries 2 through 4 above? What are the costs and benefit of each option?
After thorough analysis of the company’s current fiscal place and based on the jutting hereafter gross revenues and possible growing chances. we extremely recommend sing the option of publishing new common stocks. Given Flash thrusts beginning of support. the company has the following options to run into its fiscal duty.
Rely entirely on reinvestment of Flash’s gaining to fund growing Obtain extra funding through their factorization groupA private sale of common stock
Based on the historical information. the company has non generated adequate hard currency flow to back up their operations and the current fiscal place of the company would restrict them from taking up new undertakings. Hence. the option of reinvesting the net incomes to fund growing is non applicable. So far. the company has used notes collectible from a commercial bank ; nevertheless it has reached the 70 % bound set by the bank. This leaves the company with the other two options of borrowing extra financess from factoring group or a sale of common stock. There are some pros and cons for each of the options available. If the company goes with factoring group. the bing stockholders would retain the ownership of the company. The downside to this option far outweighs the benefits because the bank would increase the involvement rate from 4 % to 6 % and the factorization group will supervise the histories receivable closely and more sharply.
Since the extra hazard and higher costs are associated with the loan borrowed from factoring group. this option doesn’t seem to be a good tantrum for the company. The best option for funding would be to sell the common stock. By comparing the Flash memory’s figure of portions outstanding with its rivals. it is apparent that the equity funding is comparatively low. This option seems to offer several advantages besides the other two options. By publishing common stock. the company and the bing stockholders would give up about 20 % of its ownership. which is sensible for a company that is confronting uninterrupted competition from companies keeping larger market portion within the industry. This option would easy the company by non holding to worry about the involvement rates and increase in debt.
What would investing in the new merchandise line do to Flash’s needed external funding? Which funding option. traveling to the factoring group or publishing new equity. should CFO Hathaway Browne select to outdo meet the company’s demands?
a. Is at that place sufficient funding available in the bing bank loan understanding?
No. the bing bank loan understanding is deficient to run into the funding demands of the company. In order for the company to run into future demands and to run its operations. it will needs extra beginnings of support. The options available for the company are either to borrow from the bank or to publish common stock. The latter seems to be a better option based on our analysis of the company.
B. Can the company take on more debt funding?
No. it is non recommended for the company to take on more debt funding as it would increase the company’s debt and involvement rates.
c. How attractive is the proposal to travel its bank funding agreement to the factoring divisions?
It is non a good thought to see factoring group to run into the funding demands of brassy memory. As mentioned earlier. the company has reached the maximal sum that can be borrowed based on its histories receivable. Although. the factoring group has offered to supply extra loan to the company with some conditions such as uninterrupted monitoring of Flash memory’s recognition extension policy and histories receivable. this option is non a good beginning of support. Alternatively. the issue of new common stock would be an attractive option for run intoing Flash thrusts fiscal duties.
d. What is the impact of a private sale of new common stock?
A private sale of new common stock will thin the ownership of bing stockholders. There is hazard of bead in portion monetary values when Flash Memory announces extra portion issues. However. if the extra financess are invested expeditiously to bring forth higher net incomes. portion monetary values could lift. which benefits all stockholders. The impact would be on the company and bing stockholders because issue of extra stock would ensue in a lessening in net incomes per portion. intending the net incomes will be divided by a greater figure of portions.
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