Flash Memory Inc. Case Solution
FLASH MEMORY INC.
The report presents a case about Flash Memory Inc., which was established in San Jose, California. Flash Memory Inc. has a sensational history since its creation but with the passage of time and with the innovation of new electronics and computers devices, the industry was facing new challenges, which threatened the profits of the company and made the company to worry about its future.
Industry consists of giants like Intel, Samsung and smaller firms like Micron Technology, SanDisk Corporation, STEC Inc., and Flash Memory Inc. The demand for high performance devices and components was growing, particularly memory devices. Flash Memory Inc. had focused on Solid State Drives (SSDs), which is the fastest growing division in the overall memory industry. Industry statistics illustrated that the SSD market expanded from about $400 million in 2007 to $1.1 billion in 2009, and it was further forecasted to grow to $2.8 billion in 2011 and $5.3 billion in 2013. By 2010, the Flash Memory Inc.’s board of directors consisted of six members, and they had possession of the entire equity in the firm.
Due to changes in technology, Flash Memory Inc.’s memory and other products have short product life cycles. The company’s new products normally realized 70% of their maximum sales level in their first year, and maximum sales were achieved that were maintained in the second and third year. The fourth year and the proceeding years saw rapid decaying sales, and by the sixth year, the products were out of date. This normal sales life cycle for the company’s products, however, could be significantly shortened by technologically superior new products released by competitors.
Flash Memory Inc. had used notes payable obtained from the company’s commercial bank, and secured by the pledge of accounts receivable so as to fund this growth of working capital. Although, these notes payable were technically short-term loans, but in actuality they represented permanent financing as the company continually relied on these loans to finance both its existing operations and new investments.
The problem in the case is that, Flash Memory Inc. is considering expanding its business operations but for that the company is in need of the financing. Hathaway Browne, the Chief Financial Officer of Flash Memory Inc. wanted to analyze the future aspect of the investment and financing requirements for the expansion as the company was not growing with stable pace. The high market competition and rapid growth attracted the big giant of the other market to enter into this market segment, which created problems for Flash Memory Inc. in terms of reducing its profit margins and it also affected its working capital requirements, which lowered its investment capacity and also worsen Flash Memory Inc.’s financial position in the market.
The analysis was performed to solve the given requirements below:
Financial statement forecast from 2010 to 2012 as if the new product line project will not be approved with an assumption that company will borrow from bank:
Flash Memory Inc. was preparing the company’s financing and investing plan for three years. Due to strong industry and company growth, Flash Memory Inc. needed to restructure its capital structure for increasing its sales revenue. Flash Memory Inc.’s bank is reluctant to extend additional loan to the company as it has reached at its limit because its bank note payable almost reached at 70% of the face value of its receivable amount. However, the factoring group would lend up to 90% of the company’s existing accounts receivable balances, but this group would also monitor Flash Memory Inc.’s credit extension policies and accounts receivable collection activities more rigorously than the commercial loan department that currently managed the company’s loan agreement. Bank will also charge an extra 2% interest rate of 9.25% instead of 7.25%. In order to evaluate whether the company needed addition funds, we have made forecasted income statement and balance sheet for next three years i.e. 2010, 2011 and 2012. Forecasted income statement and balance have been prepared by using the assumption that Flash Memory Inc. has provided.
Forecasted financial statement is based on assumptions; however, many of these assumptions do not seem reasonable. One of the most unreasonable assumptions is that purchase should be 60% of the cost of goods sold in each year; therefore, inventory value should fall from 2010 to 2012 instead of growing to the net sale. It is unreasonable because by using this assumption, inventory value will drop dramatically instead of growing proportionally, as inventory outflow will increase due to small purchase. Moreover, property, plant and equipment (PP&E) as percentage of total sales were 5.85%, 6.1% and 6.33% of the sales respectively in 2007 to 2009. But net PP&E as a percentage to net sales is assumed to be 4.95% in 2010. As sales are continuously increasing; therefore, more investment is required in non-current assets as compared to past. Investment in non-current assets is assumed fixed of $900,000. Therefore, this assumption also seems to be unreasonable and ……………
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