Flash Memory, Inc Valuation Analysis

The University of Oklahoma

Flash Memory, Inc.

Valuation of Proposed Investment

Group 2: Brandy Steele, Gina McCreary, Shameeka Wyatt

Corporate Finance - FIN 5312-996

Professor Bill Megginson

November 1, 2018

Flash Memory, Inc. is a small firm in the U.S. operating in the computer and electronic device memory market. They compete in product markets that reflected fast growth, continuous technological change, short product life cycles, changing customer wants and needs, a large number of competitors, and high level of rivalry within the industry.

Flash Memory focuses on solid state drives (SSD), which is the fastest growing segment in the memory industry mostly used in smartphones, laptop computers, and netbooks. From 2007-2009, the SSD market grew from $400 million to $1.1 billion and is projected to grow $2.8 billion to $5.3 billion from 2011-2013.

In 2010, Flash Memory specialized in design and manufacturing of SSD’s with 80% of their sales revenue transpiring from memory components and the other 20% from other high performance electronic components for same end products. The SSD market is highly competitive with intense rivalry. This type of technology also experiences short product life which impacted sales for Flash Memory starting in 2010. The decrease in sales forced Flash Memory to obtain a bank line of credit, secured by account receivables, to finance their decision to spend aggressively in research and development for product line improvements and to add new ones. However, when Flash Memory reached their 70% receivable face value limit, they were forced to explore other financing options with increased monitoring costs and interest rates.

In the following sections we will provide an explanation of the current financial position and strategy for Flash Memory, Inc. We will also provide forecasted financial statements and risk measurement reports with detailed summaries to show Flash Memory’s current position in comparison to a new proposed investment opportunity. Lastly, we will provide our recommendations for Flash Memory’s future course of action.

In exhibit A, a 3-year forecasted income statement was prepared to show the projected sales growth and net income for Flash Memory if they decided to continue with their current business plan and not accept the investment for a new product line that would require increased financing terms. Our sales projections show Flash Memory’s sales increasing from $89.2 million in 2009 to $144 million in 2012. The forecast also shows from 2009-20012, their net income increased from $2.5 million to $4.1 million. The overall estimated projection shows growth in sales by $54.8 million and an increase in net income by $1.6 million.  

We also prepared a 3-year forecasted balance sheet, shown as exhibit B, based on the continuation of the current business plan. The forecasted balance sheet shows an increase in total assets from $35.1 million in 2009 to $52 million in 2012. The positive yearly trend are results of the rapidly increasing accounts receivables over the 3-year period from $14.6 million in 2009 to $23.6 million in 2012. Unfortunately, Flash Memory’s total liabilities have increased as well. This is a direct result from their increased notes payable from $10.1 million to $12.7 million from 2009 to 2012 and the large spike in accrued expenses from $652 thousand in 2009 to $1 million in 2012. Overall, the projections show a favorable future for Flash Memory if they decide not to invest as long as their sales continue to grow. Their total equity continues to grow every year, increasing from $19.6 million in 2009 to $31.3 estimated for 2012. This is largely contingent on the estimated increase from their retained earnings which more than doubled over the 3 years from $11.6 million in 2009 to $23.3 million in 2012. This tells us that the firm will be profitable in the next 3-years.  

Flash Memory, Inc. has been presented with an investment proposal for a new product line which is expected to have a significant impact on the company’s sales, profits and cash flows. Implementing this new product line will require an initial investment of $2.2 million for plant and equipment in 2010 and $300,000 for a marketing campaign in 2011. This new product line is expected to provide a competitive advantage in a highly aggressive market. The recommendation would be to accept the new product line.  For evaluation of the project, the Internal Rate of Return (IRR) must be greater than the Weighted Average Cost of Capital (WACC). The company already invested $400,000 in the last nine months which will be treated as sunk costs. The new product line will generate continuous cash flows for the next five years, sales will continue to bring in positive net income.