Flash Memory, Inc.
Income Statement ($000s except EPS)
Actual
Forecast
2007
2008
2009
2010
2011
2012
$77,131
$62,519
81.1%
$14,612
$80,953
5.0%
$68,382
84.5%
$12,571
$89,250
10.2%
$72,424
81.1%
$16,826
$120,000
34.5%
$97,320
81.1%
$22,680
$144,000
20.0%
$116,784
81.1%
$27,216
$144,000
0.0%
$116,784
81.1%
$27,216
$3,726
4.8%
$6,594
8.5%
$4,292
$4,133
5.1%
$7,536
9.3%
$902
$4,416
4.9%
$7,458
8.4%
$4,952
$6,000
5.0%
$10,032
8.4%
$6,648
$7,200
5.0%
$12,038
8.4%
$7,978
$7,200
5.0%
$12,038
8.4%
$7,978
$480
$652
$735
-$39
-$27
-$35
$937
9.25%
-$50
$1,323
9.25%
-$50
$1,565
9.25%
-$50
Income before income taxes
$3,773
$223
$4,182
$5,661
$6,604
$6,363
Income taxes
- % of income before taxes
Net income
$1,509
40.0%
$2,264
$89
39.9%
$134
$1,673
40.0%
$2,509
$2,264
$2,642
$2,545
$3,396
$3,963
$3,818
$1.52
$0.09
$1.68
$2.28
$2.66
$2.56
2007
2008
2009
2010
2011
2012
$2,536
3.3%
$10,988
33
$9,592
56
$309
0.3%
$23,425
$2,218
2.7%
$12,864
33
$11,072
59
$324
0.2%
$26,478
$2,934
3.3%
$14,671
37
$11,509
58
$357
0.2%
$29,471
$3,960
3.3%
$19,726
60
$13,865
52
$480
0.4%
$38,031
$4,752
3.3%
$23,671
60
$16,638
52
$576
0.4%
$45,637
$4,752
3.3%
$23,671
60
$16,638
52
$576
0.4%
$45,637
$5,306
$792
$4,514
$6,116
$1,174
$4,942
$7,282
$1,633
$5,649
$8,182
$2,179
$6,003
$9,082
$2,793
$6,290
$9,982
$3,474
$6,508
$27,939
$31,420
$35,120
$44,034
$51,926
$52,145
Accounts payable
- Days purchases
Notes payable
$3,084
30
$6,620
$4,268
38
$8,873
$3,929
33
$10,132
$4,799
30
$14,306
$5,759
30
$16,914
$5,759
30
$13,325
Accrued expenses
$563
$591
$652
$876
$1,051
$1,051
Income taxes payable
- % of taxes
Other current liabilities
- % of sales
Total current liabilities
$151
10%
$478
0.6%
$10,896
$9
10%
$502
0.6%
$14,243
$167
10%
$554
0.6%
$15,434
$226
10%
$744
0.6%
$20,951
$264
10%
$893
0.6%
$24,881
$255
10%
$893
0.6%
$21,282
Common stock at $0.01 per share par value
Paid in capital in excess of par value
Retained earnings
Total shareholders' equity
$15
$7,980
$9,048
$17,043
$15
$7,980
$9,182
$17,177
$15
$7,980
$11,691
$19,686
$15
$7,980
$15,087
$23,082
$15
$7,980
$19,050
$27,045
$15
$7,980
$22,868
$30,863
Total liabilities & shareholders' equity
$27,939
$31,420
$35,120
$44,034
$51,926
$52,145
1,491,662
1,491,662
1,491,662
1,491,662
1,491,662
1,491,662
Book value per share
$11.43
$11.52
$13.20
$15.47
$18.13
$20.69
Return on equity
Interest coverage ratio (times)
Notes payable / accounts receivable
Notes payable / shareholders' equity
Total liabilities / shareholders' equity
13.3%
8.9
60.2%
38.8%
63.9%
0.8%
1.4
69.0%
51.7%
82.9%
12.7%
6.7
69.1%
51.5%
78.4%
14.7%
7.1
72.5%
62.0%
90.8%
14.7%
6.0
71.5%
62.5%
92.0%
12.4%
5.1
56.3%
43.2%
69.0%
Sales
- YOY growth
Cost of goods sold
- % of sales
Gross margin
Research and development
- % of sales
Selling, general and administrative
- % of sales
Operating income
Interest expense
- Interest rate %
Other income (expenses)
Earnings per share
Exhibit 1 (continued)
Balance Sheet ($000s except shares outstanding and book value per share)
Actual
Cash
- % of sales
Accounts receivable
- Days of sales
Inventories
- Days of COGS
Prepaid expenses
- % of sales
Total current assets
Property, plant & equipment at cost
Less: Accumulated depreciation
Net property, plant & equipment
Total assets
Number of shares outstanding
Forecast
$128,000
-11.1%
Micron Technology
D = book value of debt
BVE = book value of equity
MVE = market value of equity
$2,760
$5,603
$7,925
E = equity or levered beta
A = asset or unlevered beta
SanDisk Corporation
D = book value of debt
BVE = book value of equity
MVE = market value of equity
$975
$4,157
$9,135
E = equity or levered beta
A = asset or unlevered beta
STEC, Inc.
D = book value of debt
BVE = book value of equity
MVE = market value of equity
$0
$276
$699
E = equity or levered beta
A = asset or unlevered beta
Average A for the industry
Current weights of debt and equity
D = value of bank debt from 2009 balance sheet
E = value of equity at $25 per share
Since Flash is at the limit of its current loan agreement, management believes this is a
higher proportion of debt finance than optimal. As stated in the case, management has
set target capital structure weights equal to 18% debt and 82% equity.
Flash Memory, Inc.
D = target value of debt
E = target value of equity
A = average asset beta for the industry
E = equity or levered beta
Cost of equity capital for Flash
Ke = Rf + E x Market Risk Premium
$10,132
$37,292
Rf = risk-free rate of return
E = Flash's equity or levered beta
Assumed market risk premium
Ke = Flash's cost of equity capital
K = Wd x Kd x (1 - T) + We x Ke
Wd = weight of debt in Flash's capital structure
Kd = Flash's cost of debt capital (a)
T = Flash's income tax rate
We = weight of equity in Flash's capital structure
Ke = Flash' cost of equity capital
K = Flash's cost of capital
(a) at 18% weight of debt Flash will be within the 70% of accounts receivable limit of
the existing loan agreement, thus the 7.25% cost of debt capital. If Flash was over
this limit and changed to factoring, the cost of debt capital would increase to 9.25%,
and the equity beta and cost of equity capital would also increase.
25.8%
74.2%
1.25
9.6%
90.4%
1.36
1.28
0.0%
100.0%
1.00
1.00
0.76
21.4%
78.6%
18.0%
82.0%
0.76
1.27
3.70%
1.27
6.00%
11.3200%
18.00%
7.25%
40.00%
82.00%
11.32%
10.065400%
Flash Memory, Inc.
Exhibit 4
Selected Financial Information for Flash Memory, Inc., and Selected Competitors, 2007 through 2009
2007
Sales ($ millions)
EPS ($)
Dividend per share ($)
Closing stock price ($)
Shares outstanding (millions)
Book Value per share ($)
ROE
Capitalization (book value)
Debt
Equity
Beta coefficient
Flash Memory, Inc.
2008
2009
30-Apr-10 (a)
2007
77
1.52
-n/a
1.492
11.43
13.28%
81
0.09
-n/a
1.492
11.52
0.78%
89
1.68
-n/a
1.492
13.20
12.75%
5,688
-0.42
-7.25
769.1
10.08
-4.13%
5,841
-2.10
-2.64
772.5
8.00
-26.21%
4,803
-2.29
-10.56
800.7
5.81
-39.43%
28%
72%
34%
66%
34%
66%
n/a
24%
76%
31%
69%
40%
60%
SanDisk Corporation
Sales ($ millions)
EPS ($)
Dividend per share ($)
Closing stock price ($)
Shares outstanding (millions)
Book Value per share ($)
ROE
Capitalization (book value)
Debt
Equity
Beta coefficient
Micron Technology
2008
2009
3,986
0.84
-33.17
227.7
22.64
3.70%
3,351
-8.82
-9.60
225.3
15.27
-57.74%
3,567
1.83
-28.99
227.4
17.18
10.63%
15%
85%
22%
78%
21%
79%
30-Apr-10 (a)
1.46
9.35
847.6
6.61
21.00%
33%
67%
1.25
STEC, Inc.
3.71
39.84
229.3
18.13
17.87%
19%
81%
1.36
189
0.20
-8.74
49.8
3.72
5.40%
227
0.09
-4.26
50.0
3.63
2.36%
354
1.47
-16.34
49.4
5.65
26.06%
0%
100%
0%
100%
0%
100%
(a) Security analyst estimates for year-end EPS $ and Return on Equity; actual data on April 30, 2010, for all other items.
1.29
13.90
50.3
5.48
18.90%
0%
100%
1.00
Flash Memory, Inc.
Exhibit 3 Net Present Value of Investment in New Product Line ($000s)
2010
-$2,200
2011
2012
2013
2014
2015
Total
Investment in equipment
Net working capital required to support sales
- % of sales
Investment in net working capital (the year-on-year change)
$5,648
26.15%
-$5,648
$7,322
26.15%
-$1,674
$7,322
26.15%
$0
$2,877
26.15%
$4,446
$1,308
26.15%
$1,569
$0
26.15%
$1,308
$0
$21,600
$17,064
79.00%
$0
$1,806
8.36%
$300
$28,000
$22,120
79.00%
$0
$2,341
8.36%
$0
$28,000
$22,120
79.00%
$0
$2,341
8.36%
$0
$11,000
$8,690
79.00%
$0
$920
8.36%
$0
$5,000
$3,950
79.00%
$0
$418
8.36%
$0
Income before income taxes
Income taxes @ 40%
$2,430
$972
$3,539
$1,416
$3,539
$1,416
$1,390
$556
$632
$253
Net income
Depreciation of equipment @ 20% SLM
$1,458
$440
$2,124
$440
$2,124
$440
$834
$440
$379
$440
Cash flow from operations
$1,898
$2,564
$2,564
$1,274
$819
$225
$2,564
$7,009
$2,843
$2,127
Sales
Cost of goods sold (includes equipment depreciation)
- % of sales
Research & development
Selling, general & administrative
- % of sales
Launch promotion
Total cash flow
-$7,848
NPV @ cost of capital
IRR
MIRR
2,982.3
21.9%
17.4%
Cost of capital
10.07%
$2,200
Flash Memory, Inc.
Exhibit 3
Key Forecasting Assumptions and Relationships for 2010 Through 2012
Line Item
Cost of goods sold
Research and development
Selling, general and administrative
Interest expense
Other income (expenses)
Cash
Accounts receivable
Inventories
Prepaid expenses
Property, plant & equipment at cost
Accumulated depreciation
Accounts payable
Purchases
Accrued expenses
Income taxes payable
Other current liabilities
tions and Relationships for 2010 Through 2012
Assumption or Ratio
81.10% of sales
5.0% of sales
8.36% of sales
Beginning of year debt balance interest rate
$50,000 of expense each year
3.3% of sales
60 days sales outstanding
52 days of cost of good sold
0.4% of sales
Beginning PP&E at cost + capital expenditures
Beginning A/D + 7.5% of beginning PP&E at cost
30 days of purchases
60% of cost of goods sold
0.73% of sales
10% of income taxes expense
0.62% of sales
