TO: FROM: DATE: SUBJECT:

Mr. Hathaway Browne, CFO of Flash Memory Inc. MP.JAW Consultants October 11, 2010 Analysis of the Investment Opportunity and Financing Options

! As your financial consultants, we have conducted a comprehensive analysis of Flash Memory Inc. (FMI)’s current business situation, its new potential investment opportunity, and financing options. Our recommendations are as follows: 1. Pursue the suggested new product line. 2. Seek additional funding through equity financing and reinvestment of earnings. We proceed to present our findings, analyses, and rationales behind these recommendations.

Current Business Environment
FMI is a small private firm specializing in manufacturing “solid state drives” (SSDs), a …show more content…
Under its new loan agreement, the firm will expect to experience a surge in interest rate from prime plus 4% to prime plus 6% (total of 9.25%). This is due to the additional risk and cost associated with closer monitoring of the loan. As result of increased level of borrowing, interest expense is projected to increase from $1,323K to $1,527K in 2011, and from $1,565K to $2,207K in 2012. The general outlook on the changes in the income statement is positive due to sales from the new product line, which is expected to generate a higher 21% gross margin throughout its life. In the revised balance sheet, capital expenditure in 2011 will notably increase by $2.2 million to account for the new plant and equipment needed for the investment project. Furthermore, Notes Payable is expected to increase in the new projected statements (from $16,914K to $21,646K in 2011). This reflects the additional borrowing that FMI requires to finance its new investment project. Although high Notes Payable is a cause for concern in 2011, this account is projected to decrease to $16,707K in 2012. The account will further decline as the firm generate cash from the increased sales and consequently borrow less. In order to maintain the required amount of working capital, FMI will need to closely monitor accounts receivable collection activities to ensure that sufficient cash can be