Ayesha Tahir- 18542 Business Finance-II

MBA-M Flash Memory Case

Flash was founded in late 1990’s by four electrical engineers but additional shares were issued
which was bought by two engineers and by 2010 the company was owned by six individuals who
were also the board of directors of the firm.

Flash Memory is a small firm that concentrates in the design and manufacture of solid state
drives (SSDs) and memory modules for the computer and electronics industries. The company
invests belligerently in research and development of new products to stay ahead of the
competition. Augmented working capital requirements force the CFO to consider alternatives for
additional financing. Since, Flash Inc operates in a highly competitive industry, it is also
considering investing in a new product line which may become profitable for the company
and give it an edge against its competitors.

The company has two finance possibilities to choose from. Either, it can finance by Equity or
through Debt. The equity based finance requires the company to raise 300,000 shares at $23 per
share, after deducting issuance expenses. The company takes short term liabilities and it has
reached its breaking point of 70%. This is a undesirable signal for the company. The company’s
debt to equity ratio is at 18%. The company should borrow a long term loan in substitution of
the short term debt, while trying to maintain the current Debt to Equity ratio. It will also allow
the company to make better decisions regarding its Working Capital.

From calculations, it is visible that equity option seems undesirable in comparison with debt
financing due to higher cost of equity. Hence, it is advisable to management to take on debt
financing option and invest retained earnings to finance.

To see whether the project is profitable, NPV and IRR for the project were calculated. The NPV
was $3,139,066.25 and the IRR was 22.5%. Since, the NPV of the project is positive, it is
suggested that Flash Inc invest in this product line as it will add to the value of the company.
Moreover, since the IRR is greater than the cost of capital calculated as 10%, it is
recommended to invest in this project.

Other than NPV and IRR some qualitative factors should also be looked upon to make a sound
decision.