Calculate Flash$$s weighted average cost of capital. $($Hint: Again be explicit about eachand every assumption, and be sure to include your calculated formula $$ and solution $$in your write$-$up$.)$ One of Hathaway Browne's primary responsibilities as CFO was to finance both the growth of

Flash's existing product lines and all new investments that were approved by the board of directors. Investment proposals were prepared by the company's design, manufacturing, and marketing managers, thoroughly analyzed by Browne and the finance group, and then sent to the board for

discussion, evaluation, and finally acceptance or rejection. Browne had recently been given a proposal for a major new product line, which was expected to have a significant impact on the company's sales, profits, and cash flows. This new product line had been in development for the past nine months, and $$400,000$ had already been spent taking the product from the concept stage to the point where working prototypes had been built and were currently being tested. Flash's design and marketing people were very excited about this new product line, believing its combination of speed, size, density, reliability, and power consumption,

would make it a winner in the fastest growing segment of the memory industry. Customer acceptance and competitor reaction to the new product line was uncertain, but the project's sponsors were confident it would generate sales of at least $$21\mathrm{.}6$ million in $2011$ and $$28$ million in $2012$ and $2013,$ before falling off to $$11$ million in $2014$ and $$5$ million in $2015.$ The product was also believed to be superior to existing memory products, and would therefore command gross

margins of $21\%$ throughout its life. Implementing this new product line would also require large investments and expenditures by the company. New plant and equipment costing $$2\mathrm{.}2$ million must be purchased, and this specific equipment would be depreciated straight$-$line to zero salvage value over its five$-$year life. This depreciation expense all flowed to cost of goods sold expense, and was already included in the estimate that cost of goods sold would be $79\%$ of sales. Flash also expected net working capital would be $26\mathrm{.}15\%$ of sales. This initial investment in equipment and net working capital would occur in $2010,$ and in subsequent years the net working capital would increase and then decrease, as sales of the new product line rose and then fell. SG&A expenses were expected to be the same percent of sales as the company experienced in $2009,$ but in addition the marketing manager also planned a one$-$ time $$300,000$ advertising and promotion campaign simultaneous with the launch of the product in $2011.$Although the loan officer of Flash's commercial bank had stated the company could obtain additional financing through their factoring group, a private sale of common stock was another financing alternative. Investment bankers had indicated to Browne that the company could issue up

to $300,000$ shares of new common stock to a large institutional investor at a price of $$25\mathrm{.}00$ per share. After deducting the investment bankers' fee and other expenses associated with negotiating and closing this private transaction, the company could expect to receive about $$23\mathrm{.}00$ per share. Browne needed to analyze this proposed equity offering in comparison to the publicly traded common stock of a select group of competitors $($Exhibit $4),$ and in comparison to Flash's forecasted results with and

without a new equity offering.CFO Browne also believed the spread between the vield to maturity on long$-$term U$.$S$.$ Treasury bonds versus the expected return of the overall stock market was about $6\%,$ and he used this number

as the market risk premium when calculating Flash's cost of equity capital. One other alternative to the external financing options was to rely solely on the reinvestment of Flash's earnings to fund growth. Since the company's profit margins were relatively low, this would not provide sufficient funding to support forecasted sales of $$120$ million in $2010$ and subsequent increases; Flash would be forced to slow its rate of growth. Browne thought the favorable outlook for growth and profitability made this alternative unattractive, but he was uncertain about which financing alternative to recommend to management and the board of directors. In addition, the board of directors had expressed concer that Flash's notes payable balances continually approached the existing loan agreement's $70\%$ of accounts receivable limit$.$ They felt this indicated the use of debt finance was greater than the company's target debt$-$to$-$capital ratio of $18\%,$ which the board of

directors believed was appropriate for Flash Memory, Inc. Cash $

$3\mathrm{.}960$

$,$

$000$

Accounts receivable

$19\mathrm{.}726\mathrm{.}000$

Inventory

$13$

$,$

$865$

$,$

$000$

Prepaid expenses

$480\mathrm{.}000$

Total current assets $

$38$

$,$

$031$

$,$

$000$