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Ocean Carries

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Submitted By wyc830531
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March 20, 2013
Mr. Browne,
At your request I have completed reviewing the viability of launching a new product line and its financing options for Flash Memory, Inc (FMI). I recommend implementing the new product line and financing the launch of the new product by issuing additonal equity to cover the cash flow requirements.
I first analyzed the incremental free cash flows (FCFs) from the new product line using the growth assumptions you provided, which are outlined in the FCF analysis (Exhibit 1). I then calculated the net present value (NPV) of the FCFs using a weight average cost of capital (WACC) of 9.93%. I calculated the WACC by using FMI’s target debt-to-capital ratio of 18% and an equity β of 1.20, which I determined using the average unlevered asset β of FMI’s competitors. The detailed WACC calculations are presented in Exhibit 2. Using the WACC as a discounted rate, I calculated the NPV of the project’s cash flows to be $1.8M. Therefore, I recommend implementing the new product line.
I then reviewed how FMI can finance the project. I first looked at if FMI could finance the project by relying on reinvestment of earnings from its current business. Using the assumptions you provided and the growth projections of FMI, I forecasted balance and income statements for 2010 and 2011. These projections are presented in Exhibits 3 and 4. As shown in these exhibits, FMI will need to borrow an additional $4.2M and $2.6M in 2010 and 2011, respectively, to fund its NWC growth. Additionally, when I looked at the FCFs from FMI’s current business, it showed that FMI would not have enough cash to fund the project. Exhibit 5 shows that FMI’s current business will have a negative cash flow of $1.1M in 2010. As shown in Exhibit 1, the project would require cash of $7.8M in 2010 to launch the new product line. Therefore, I have concluded FMI cannot finance the project

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