The CFO of Flash Memory, Inc. is organziaing the company’s future financing and investing goals for the coming three years. Flash Memory is a mediocre sized firm that has developed expertise in the construction and production of Solid state drives (SSDs) and memory units for the computer and automated industries. The organization determinedly funds the research and development (R&D) of innovative goods in order to maintain it’s competitive edge in the industry over other key players. Higher needs for the working capital have compelled the CFO to take into consideration other means for further funding. Additionally, he must also think about an investment o in a novice product line that has the capability of turning extremely lucrative. Students will be required to construct financial predictions and forecasts, compute the weighted average cost of capital (WACC), approximate cash flows, and assess financing options available. This case is specifically suggested to be given a sa final exam in an MBA-level corporate finance course. Key concepts and learning include: Capital Budgeting, Cash Flows, Financial Forecasting, Long Term Financing, Net Present Value (NPV), and Weighted Average Cost of Capital (WACC)
New project NPV
Cost of Equity
Financing for New Project
Q1: Assuming the company does not invest in the new product line, prepare forecasted income statements and balance sheets at year-end 2010, 2011, and 2012. Based on these forecasts, estimate Flash's required external financing: in this case all required external financing takes the form of additional notes payable from its commercial bank, for the same period.
Q2: Assume that firm will issue equity if it decides to go ahead with the new project:
a: Construct a table showing all the project cash flows from initial outlay to termination.
b: Calculate the NPV, IRR and Payback period for the project.
c: Should the company accept or reject this investment opportunity?
Q3: How would this decision change if the executive team decided to finance the project with bank loans?