Flash Memory Inc. Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

BALANCE SHEET

The balance sheet of the company shows a similar picture as that of the Income Statement of the company. The company’s total assets increase in the first three years but after that they fall drastically in the next two years as the receivables and amount of cash of the company are decreasing simultaneously that is reducing total current assets, which is causing a sharp decline in the total assets.

In the other half of the balance sheet, the current liability seems to come to a halt; this is mainly because current liability is taken as 0.62% of sales of that year. Moreover, reduction in sales had brought reduction in liability but the company is not benefiting from it, which is a clear reflection in the return on equity of the company that is falling by a steep pace in the last three years. This reduction indicates that with the passage of time, the investment starts to lose its value and the return on it starts to reduce until the market completely rejects the product.

Forecasted Balance Sheets, 2010–2012 ($000s)
	2010	2011	2012	2013	2014
Cash	3,960	4,752	4,752	4,224	3,465
Accounts receivable	19,726	23,671	23,671	21,041	17,260
Inventories	13,865	16,638	16,638	14,789	12,132
Prepaid expenses	480	576	576	512	420
Total current assets	38,031	45,637	45,637	40,566	33,277
Property, plant & equipment at cost	8,182	9,082	9,982	10,882	11,782
Less: Accumulated depreciation	2,179	2,793	3,474	4,223	5,039
Net property, plant & equipment	6,003	6,289	6,508	6,659	6,743
Total assets	44,034	51,926	52,145	47,226	40,020
Accounts payable	4,799	5,759	5,759	5,119	4,199
Notes payable (Balancing Figure)	14,320	16,930	13,341	13,342	13,343
Accrued expenses	876	1,051	1,051	934	767
Income taxes payable	226	264	254	219	168
Other current liabilities	744	893	893	794	651
Total current liabilities	20,966	24,897	21,299	20,408	19,128
Common stock at par value	15	15	15	15	15
Paid in capital in excess of par value	7,980	7,980	7,980	7,980	7,980
Retained earnings	15,087	19,049	22,866	26,151	28,672
Total shareholders' equity	23,067	27,029	30,846	34,131	36,652
Total liabilities & shareholders' equity	44,034	51,926	52,145	54,540	55,780
Number of shares outstanding	1,492	1,492	1,492	1,492	1,492

ROE	0.15	0.15	0.12	0.10	0.07
Book Value per Share	15.5	18.1	20.7	22.9	24.6

INVESTMENT APPRAISAL

The need for continuous updating and innovation in the company has up taken a project for a major new product line, which will increase sales, profits and cash flows. The company requires $2.2 million of finance to up take this project; the company has two options to finance this project that us either to undertake debt finance by taking further loan notes and pledging 90% value of the receivables or the company can sell its shares privately.

Under both conditions, Discounted Cash Flow has to be generated as both finance options have different risk profiles; both options will lead to different cost of capital of the company calculated through WACC. Under each option, net present value has to be calculated and the option that has a greater NPV will be the most feasible option for the company.

The discounted cash flow has been conducted through data provided as per the case,

Discounted Cash Flow
Investment In New Product Line (USD millions)
Year	2010	2011	2012	2013	2014	2015	2016
Initial Investment	(2.20)
Sales revenue		21.60	28.00	28.00	11.00	5.00
Gross Profit Margin	-	4.54	5.88	5.88	2.31	1.05	-
Advertising		(0.30)
Taxable Profit	(2.20)	4.24	5.88	5.88	2.31	1.05	-
Taxation			(1.69)	(2.35)	(2.35)	(0.92)	(0.42)
Profit After Taxation	(2.20)	4.24	4.19	3.53	(0.04)	0.13	(0.42)
Working Capital		(5.65)	(7.32)	(7.32)	(2.88)	(1.31)	-
Add Back Depreciation Expense		0.44	0.44	0.44	0.44	0.44	-
Working Capital - Recovered						24.49
Net Cash Flows	(2.20)	(0.97)	(2.70)	(3.36)	(2.48)	23.74	(0.42)

WACC & CAPM

For the calculation of CAMP, equity risk premium is taken as 6% that is given in the case. Risk free return is taken as 10-year treasury bond that is 3.70% as provided in exhibit but for the calculation for beta, the beta of competitive companies have been taken un-geared to calculate beta asset. The average of the beta asset of the competitive companies is assumed to be the beta asset of the industry, which is then geared by the data of the Flash Drive company that gives a beta equity of 1.38 (Calculation of beta asset/ industry beta is conducted in exhibit-4)....................................

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