Flash Memory Strategy Paper
Hathaway Browne, CFO of Flash Memory, Inc., needs to plan on financing existing product lines and new investments that are approved by the board. Recently, a new investment opportunity has been introduced: the development of a new product line. Browne is contemplating if this proposal should be accepted by Flash and if it is, how it should be financed. This product is anticipating having a substantial effect on sales, profits, and cash flows.
The forecast of this new product is uncertain due to the factors of whether customers will accept it or not as well as the reaction of competitors. There is confidence that sales would be at least $21.6 million in 2011 and $28 million in 2012-2013. Sales will fall the following years: $11 million (2014) and $5 million (2015).
Exhibit 4 tells us that Flash Memory would endure significant cash outflows in 2010 and 2011 due to their vast initial investment in equipment and net working capital. As net working capital begins to decline, sales will continue to bring in positive net income triggering the new product line to generate cash inflows in the following five years. Another factor that plays into the decision-making is that notes payable will decrease after 2011. This allows Flash Memory to use its income from the new product line to pay off debt, which suggests that the new line will begin to generate a cash inflow in just two years. Flash was presented with two financing alternatives. One option was that they could acquire financing through a private sale of common stock. By issuing 300,000 shares of new common stock, at a price of $25.00 per share and after all expenses, the company would receive a price of $23.00 per share. Another financing alternative is to reinvest Flash’s earnings to fund growth. If Flash Memory wants to lower their debt to equity ratio, then equity financing would be a much suitable choice for them. Exhibit 5 illustrates to us that debt to equity will reach...
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