Flash Memory Strategy Paper

Flash Memory Strategy Paper

Hathaway Browne, CFO of Flash Memory Incorporated, is determining the most effective financing alternative that will help fund their recent increase in inventory and receivables. The three viable options include a factoring division of the bank, which would allow up to 90% lending, issuing private sales of common stock, or continuing to develop and release a new product line.

If Flash does not decide to continue with their new product line, from information exhibited in the case as well as exhibits 1-3, we are able to forecast Flash Memory’s balance sheet and income statement for the future years. Flash’s external financing can be seen in their notes payable numbers. By comparing the notes payable at the end of each year, we can roughly see how much financing Flash is enduring. However, accepting the bank’s offer of up to a 90% lending would lead to increased costs, interest rates, and additional risk due to closer monitoring of the loan. In addition, we can also calculate growth projections with the internal growth rate formula of retained earnings divided by net income. The result of this number will reveal if Flash should do (1) increase plow back numbers, (2) earn a higher return on equity, or (3) have a lower debt-to-equity ratio.

Doing so will allow Flash Memory to grow faster without having to raise equity capital.

Another option is to issue 300,000 new shares of common stock at a price of $25 per share. After fees, Flash can expect to receive EPS of $23. By looking at competitors’ equity information, Flash has the least amount of shares outstanding. Doing so is a reliable source of funding, but the issuance of new stock could mean a