Flash Memory Solution

Ex 1Flash Memory, Inc.Exhibit 1 Actual and Forecasted Financial Statements Assuming No Investment in New Product Line, No Sale of NewCommon Stock, and All Borrowings at 9.25%Income Statement ($000s except EPS)ActualForecast200720082009201020112012Sales$77,131$80,953$89,250$120,000$144,000$144,000$128,000$105,000- YOY growth5.0%10.2%34.5%20.0%0.0%-11.1%-18.0%Cost of goods sold$62,519$68,382$72,424$97,320$116,784$116,784- % of sales81.1%84.5%81.1%81.1%81.1%81.1%Gross margin$14,612$12,571$16,826$22,680$27,216$27,216Research and development$3,726$4,133$4,416$6,000$7,200$7,200- % of sales4.8%5.1%4.9%5.0%5.0%5.0%Selling, general and administrative$6,594$7,536$7,458$10,032$12,038$12,038- % of sales8.5%9.3%8.4%8.4%8.4%8.4%Operating income$4,292$902$4,952$6,648$7,978$7,978Interest expense$480$652$735$937$1,323$1,565- Interest rate %9.25%9.25%9.25%Other income (expenses)-$39-$27-$35-$50-$50-$50Income before income taxes$3,773$223$4,182$5,661$6,604$6,363Income taxes$1,509$89$1,673$2,264$2,642$2,545- % of income before taxes40.0%39.9%40.0%Net income$2,264$134$2,509$3,396$3,963$3,818Earnings per share$1.52$0.09$1.68$2.28$2.66$2.56Exhibit 1 (continued)Balance Sheet ($000s except shares outstanding and book value per share)ActualForecast200720082009201020112012Cash$2,536$2,218$2,934$3,960$4,752$4,752- % of sales3.3%2.7%3.3%3.3%3.3%3.3%Accounts receivable$10,988$12,864$14,671$19,726$23,671$23,671- Days of sales333337606060Inventories$9,592$11,072$11,509$13,865$16,638$16,638- Days of COGS565958525252Prepaid expenses$309$324$357$480$576$576- % of sales0.3%0.2%0.2%0.4%0.4%0.4%Total current assets$23,425$26,478$29,471$38,031$45,637$45,637Property, plant & equipment at cost$5,306$6,116$7,282$8,182$9,082$9,982Less: Accumulated depreciation$792$1,174$1,633$2,179$2,793$3,474Net property, plant & equipment$4,514$4,942$5,649$6,003$6,290$6,508Total assets$27,939$31,420$35,120$44,034$51,926$52,145Accounts payable$3,084$4,268$3,929$4,799$5,759$5,759- Days purchases303833303030Notes payable$6,620$8,873$10,132$14,306$16,914$13,325Accrued expenses$563$591$652$876$1,051$1,051Income taxes payable$151$9$167$226$264$255- % of taxes10%10%10%10%10%10%Other current liabilities$478$502$554$744$893$893- % of sales0.6%0.6%0.6%0.6%0.6%0.6%Total current liabilities$10,896$14,243$15,434$20,951$24,881$21,282Common stock at $0.01 per share par value$15$15$15$15$15$15Paid in capital in excess of par value$7,980$7,980$7,980$7,980$7,980$7,980Retained earnings$9,048$9,182$11,691$15,087$19,050$22,868Total shareholders' equity$17,043$17,177$19,686$23,082$27,045$30,863Total liabilities & shareholders' equity$27,939$31,420$35,120$44,034$51,926$52,145Number of shares outstanding1,491,6621,491,6621,491,6621,491,6621,491,6621,491,662Book value per share$11.43$11.52$13.20$15.47$18.13$20.69Return on equity13.3%0.8%12.7%14.7%14.7%12.4%Interest coverage ratio (times)8.91.46.77.16.05.1Notes payable / accounts receivable60.2%69.0%69.1%72.5%71.5%56.3%Notes payable / shareholders' equity38.8%51.7%51.5%62.0%62.5%43.2%Total liabilities / shareholders' equity63.9%82.9%78.4%90.8%92.0%69.0%

EX 2Flash Memory, Inc.Exhibit 2 Calculation of Cost of CapitalStep 1 - Calculation of asset Beta for the industry using market value weights:Micron TechnologyD = book value of debt (4-30-2010)$2,76025.8%BVE = book value of equity (4-30-2010)$5,603MVE = market value of equity (4-30-2010)$7,92574.2%E = equity or levered beta1.25A = asset or unlevered beta1.03SanDisk CorporationD = book value of debt (4-30-2010)$9759.6%BVE = book value of equity (4-30-2010)$4,157MVE = market value of equity (4-30-2010)$9,13590.4%E = equity or levered beta1.36A = asset or unlevered beta1.28STEC, Inc.D = book value of debt (4-30-2010)$00.0%BVE = book value of equity (4-30-2010)$276MVE = market value of equity (4-30-2010)$699100.0%E = equity or levered beta1.00A = asset or unlevered beta1.00Average A for the industry1.10Exhibit 2 (continued) Calculation of Cost of CapitalStep 2 - Calculation of cost of equity capital for Flash Memory, Inc.:Current weights of debt and equityD = value of bank debt from 2009 balance sheet$10,13221.4%E = value of equity at $25 per share$37,29278.6%Since Flash is at the limit of its current loan agreement, management believes this is ahigher proportion of debt finance than optimal. As stated in the case, management hasset target capital structure weights equal to 18% debt and 82% equity.Flash Memory, Inc.D = target value of debt18.0%E = target value of equity82.0%A = average asset beta for the industry1.10E = equity or levered beta1.25Cost of equity capital for FlashKe = Rf + E x Market Risk PremiumRf = risk-free rate of return3.70%E = Flash's equity or levered beta1.25Assumed market risk premium6.00%Ke = Flash's cost of equity capital11.20%Step 3 - Calculation of cost of capital for Flash Memory, Inc.:K = Wd x Kd x (1 - T) + We x KeWd = weight of debt in Flash's capital structure18.00%Kd = Flash's cost of debt capital (a)7.25%T = Flash's income tax rate40.00%We = weight of equity in Flash's capital structure82.00%Ke = Flash' cost of equity capital11.20%K = Flash's cost of capital9.96%(a) at 18% weight of debt Flash will be within the 70% of accounts receivable limit ofthe existing loan agreement, thus the 7.25% cost of debt capital. If Flash was overthis 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.

Ex 3Flash Memory, Inc.Exhibit 3 Net Present Value of Investment in New Product Line ($000s)201020112012201320142015TotalInvestment in equipment-$2,200Net working capital required to support sales$5,648$7,322$7,322$2,877$1,308$0- % of sales26.15%26.15%26.15%26.15%26.15%26.15%Investment in net working capital (the year-on-year change)-$5,648-$1,674$0$4,446$1,569$1,308$0Sales$21,600$28,000$28,000$11,000$5,000Cost of goods sold (includes equipment depreciation)$17,064$22,120$22,120$8,690$3,950- % of sales79.00%79.00%79.00%79.00%79.00%Research & development$0$0$0$0$0Selling, general & administrative$1,806$2,341$2,341$920$418- % of slaes8.36%8.36%8.36%8.36%8.36%Launch promotion$300$0$0$0$0Income before income taxes$2,430$3,539$3,539$1,390$632Income taxes @ 40%$972$1,416$1,416$556$253Net income$1,458$2,124$2,124$834$379Depreciation of equipment @ 20% SLM$440$440$440$440$440$2,200Cash flow from operations$1,898$2,564$2,564$1,274$819Total cash flow-$7,848$225$2,564$7,009$2,843$2,127NPV @ cost of capital$3,014IRR21.9%MIRR17.3%Cost of capital9.96%

Ex 4Flash Memory, Inc.Exhibit 4 Change in Forecasted Financial Statements due to Acceptance of Investment in New Product LineFinancial Statement Account ($000s)ActualForecast200720082009201020112012Sales$21,600$28,000Cost of goods sold (includes equipment depreciation)$17,064$22,120Research and development$0$0Selling, general and administrative (includes launch)$2,106$2,341Increase in operating income$2,430$3,539Cash (3.3% of sales)$713$924Accounts receivable (60 DSO)$3,551$4,603Inventories (52 days of COGS)$2,431$3,151Prepaid expenses (0.4% of sales)$86$112Net property, plant & equipment$2,200$1,760$1,320Accounts payable (60 days of purchases)$842$1,091Accrued expenses (0.73% of sales)$158$204Other current liabilities (0.62% of sales)$134$174For informational purposes only:NWC % of sales26.15%26.15%

Ex 5Flash Memory, Inc.Exhibit 5 Actual and Forecasted Financial Statements Assuming Acceptance of Investment in New Product Line, No Saleof New Common Stock, and All Borrowings at 9.25%Income Statement ($000s except earnings per share)ActualForecast200720082009201020112012Sales$77,131$80,953$89,250$120,000$165,600$172,000Cost of goods sold$62,519$68,382$72,424$97,320$133,848$138,904Gross margin$14,612$12,571$16,826$22,680$31,752$33,096Research and development$3,726$4,133$4,416$6,000$7,200$7,200Selling, general and administrative$6,594$7,536$7,458$10,032$14,144$14,379Operating income$4,292$902$4,952$6,648$10,408$11,517Interest expense$480$652$735$937$1,527$2,118Other income (expenses)-$39-$27-$35-$50-$50-$50Income before income taxes$3,773$223$4,182$5,661$8,831$9,349Income taxes$1,509$89$1,673$2,264$3,532$3,740Net income$2,264$134$2,509$3,396$5,299$5,609Earnings per share$1.52$0.09$1.68$2.28$3.55$3.76Exhibit 5 (continued)Balance Sheet ($000s except shares outstanding and book value per share)ActualForecast200720082009201020112012Cash$2,536$2,218$2,934$3,960$5,465$5,676Accounts receivable$10,988$12,864$14,671$19,726$27,222$28,274Inventories$9,592$11,072$11,509$13,865$19,069$19,789Prepaid expenses$309$324$357$480$662$688Total current assets$23,425$26,478$29,471$38,031$52,418$54,427Property, plant & equipment at cost$5,306$6,116$7,282$10,382$11,282$12,182Less: Accumulated depreciation$792$1,174$1,633$2,179$3,233$4,354Net property, plant & equipment$4,514$4,942$5,649$8,203$8,050$7,828Total assets$27,939$31,420$35,120$46,234$60,467$62,255Accounts payable$3,084$4,268$3,929$4,799$6,601$6,850Notes payable$6,620$8,873$10,132$16,506$22,897$18,719Accrued expenses$563$591$652$876$1,209$1,256Income taxes payable$151$9$167$226$353$374Other current liabilities$478$502$554$744$1,027$1,066Total current liabilities$10,896$14,243$15,434$23,151$32,086$28,265Common stock at $0.01 per share par value$15$15$15$15$15$15Paid in capital in excess of par value$7,980$7,980$7,980$7,980$7,980$7,980Retained earnings$9,048$9,182$11,691$15,087$20,386$25,995Total shareholders' equity$17,043$17,177$19,686$23,082$28,381$33,990Total liabilities & shareholders' equity$27,939$31,420$35,120$46,234$60,467$62,255Number of shares outstanding1,491,6621,491,6621,491,6621,491,6621,491,6621,491,662Book value per share$11.43$11.52$13.20$15.47$19.03$22.79Return on equity13.3%0.8%12.7%14.7%18.7%16.5%Interest coverage ratio (times)8.91.46.77.16.85.4Notes payable / accounts receivable60.2%69.0%69.1%83.7%84.1%66.2%Notes payable / shareholders' equity38.8%51.7%51.5%71.5%80.7%55.1%Total liabilities / shareholders' equity63.9%82.9%78.4%100.3%113.1%83.2%

Ex 6Flash Memory, Inc.Exhibit 6 Actual and Forecasted Financial Statements Assuming Acceptance of Investment in New Product Line, Saleof 300,000 Shares of Common Stock Receiving Net Proceeds of $23 per share, and All Borrowings at 7.25%Income Statement ($000s except earnings per share)ActualForecast200720082009201020112012Sales$77,131$80,953$89,250$120,000$165,600$172,000Cost of goods sold$62,519$68,382$72,424$97,320$133,848$138,904Gross margin$14,612$12,571$16,826$22,680$31,752$33,096Research and development$3,726$4,133$4,416$6,000$7,200$7,200Selling, general and administrative$6,594$7,536$7,458$10,032$14,144$14,379Operating income$4,292$902$4,952$6,648$10,408$11,517Interest expense$480$652$735$735$687$1,112Other income (expenses)-$39-$27-$35-$50-$50-$50Income before income taxes$3,773$223$4,182$5,863$9,671$10,355Income taxes$1,509$89$1,673$2,345$3,868$4,142Net income$2,264$134$2,509$3,518$5,802$6,213Earnings per share$1.52$0.09$1.68$1.96$3.24$3.47Exhibit 6 (continued)Balance Sheet ($000s except shares outstanding and book value per share)ActualForecast200720082009201020112012Cash$2,536$2,218$2,934$3,960$5,465$5,676Accounts receivable$10,988$12,864$14,671$19,726$27,222$28,274Inventories$9,592$11,072$11,509$13,865$19,069$19,789Prepaid expenses$309$324$357$480$662$688Total current assets$23,425$26,478$29,471$38,031$52,418$54,427Property, plant & equipment at cost$5,306$6,116$7,282$10,382$11,282$12,182Less: Accumulated depreciation$792$1,174$1,633$2,179$3,233$4,354Net property, plant & equipment$4,514$4,942$5,649$8,203$8,050$7,828Total assets$27,939$31,420$35,120$46,234$60,467$62,255Accounts payable$3,084$4,268$3,929$4,799$6,601$6,850Notes payable$6,620$8,873$10,132$9,476$15,338$10,550Accrued expenses$563$591$652$876$1,209$1,256Income taxes payable$151$9$167$235$387$414Other current liabilities$478$502$554$744$1,027$1,066Total current liabilities$10,896$14,243$15,434$16,130$24,561$20,136Common stock at $0.01 per share par value$15$15$15$18$18$18Paid in capital in excess of par value$7,980$7,980$7,980$14,877$14,877$14,877Retained earnings$9,048$9,182$11,691$15,209$21,012$27,224Total shareholders' equity$17,043$17,177$19,686$30,104$35,907$42,119Total liabilities & shareholders' equity$27,939$31,420$35,120$46,234$60,467$62,255Number of shares outstanding1,491,6621,491,6621,491,6621,791,6621,791,6621,791,662Book value per share$11.43$11.52$13.20$16.80$20.04$23.51Return on equity13.3%0.8%12.7%11.7%16.2%14.8%Interest coverage ratio (times)8.91.46.79.115.110.4Notes payable / accounts receivable60.2%69.0%69.1%48.0%56.3%37.3%Notes payable / shareholders' equity38.8%51.7%51.5%31.5%42.7%25.0%Total liabilities / shareholders' equity63.9%82.9%78.4%53.6%68.4%47.8%

Ex 7Flash Memory, Inc.Exhibit 7 Summary StatisticsNo Investment in New Product LineSell No New StockBorrow at 9.25%201020112012Earnings per share$2.28$2.66$2.56Interest coverage ratio (times)7.16.05.1Return on equity14.7%14.7%12.4%Notes payable / accounts receivable72.5%71.5%56.3%Notes payable / shareholders' equity62.0%62.5%43.2%Total liabilities / shareholders' equity90.8%92.0%69.0%Notes payable (000s)$14,306$16,914$13,325Invest in the New Product LineSell No New StockBorrow at 9.25%201020112012Earnings per share$2.28$3.55$3.76Interest coverage ratio (times)7.16.85.4Return on equity14.7%18.7%16.5%Notes payable / accounts receivable83.7%84.1%66.2%Notes payable / shareholders' equity71.5%80.7%55.1%Total liabilities / shareholders' equity100.3%113.1%83.2%Notes payable (000s)$16,506$22,897$18,719Invest in the New Product LineSell 300,000 Shares of Common StockBorrow at 7.25%201020112012Earnings per share$1.96$3.24$3.47Interest coverage ratio (times)9.115.110.4Return on equity11.7%16.2%14.8%Notes payable / accounts receivable48.0%56.3%37.3%Notes payable / shareholders' equity31.5%42.7%25.0%Total liabilities / shareholders' equity53.6%68.4%47.8%Notes payable (000s)$9,476$15,338$10,550