capital budgeting questions
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B C D E G H Flash Memory, Inc. Exhibit 4 Selected Financial Information for Flash Memory, Inc., and Selected Competitors, 2007 through 2009 Flash Memory, Inc. Micron Technology 2007 2008 2009 30-Apr-10 (a) 2007 2008 2009 30-Apr-10 (a) 8 Sales ($ millions) 77 81 89 5,688 5,841 4,803 9 EPS ($) 1.52 0.09 1.68 -0.42 -2.10 -2.29 1.46 10 Dividend per share ($) 11 Closing stock price ($) n/a n/a n/a 7.25 2.64 10.56 9.35 12 Shares outstanding (millions) 1.492 1.492 1.492 769.1 772.5 800.7 847.6 13 Book Value per share ($) 11.43 11.52 13.20 10.08 8.00 5.81 6.61 14 ROE 13.28% 0.78% 12.75% -4.13% -26.21% -39.43% 21.00% 15 Capitalization (book value) 16 Debt 28% 34% 34% 24% 31% 40% 33% 17 Equity 72% 66% 66% 76% 69% 60% 67% 18 Beta coefficient n/a 1.25 19 20 21 SanDisk Corporation STEC, Inc. 22 23 Sales ($ millions) 3,986 3,351 3,567 189 227 354 24 EPS ($) 0.84 -8.82 1.83 3.71 0.20 0.09 1.47 1.29 25 Dividend per share ($) 26 Closing stock price ($) 33.17 9.60 28.99 39.84 8.74 4.26 16.34 13.90 27 Shares outstanding (millions) 227.7 225.3 227.4 229.3 49.8 50.0 49.4 50.3 28 Book Value per share ($) 22.64 15.27 17.18 18.13 3.72 3.63 5.65 5.48 29 ROE 3.70% -57.74% 10.63% 17.87% 5.40% 2.36% 26.06% 18.90% 30 Capitalization (book value) 31 Debt 15% 22% 21% 19% 0% 0% 0% 0% 32 Equity 85% 78% 79% 81% 100% 100% 100% 100% 33 Beta coefficient 1.36 1.00 34 35 (a) Security analyst estimates for year-end EPS $ and Return on Equity; actual data on April 30, 2010, for all other items.Assignment Question Q1 W N Answers to the questions below will be found by closely examining the case. Detective work is required. If you uncover ambiguity (more than one possibility), mention both. 5 COMPUTE WEIGHTED AVERAGE COST OF CAPITAL 6 Formula Equation COST OF DEBT Coupon Rate 7.25% given Marginal Tax Rate 10.0% given 10 Cost of Deb 4.35% b5*(1-b6) k-d = 1 x (1-t) 11 Weight of debt 18% given d : d+ 12 13 COST OF EQUITY 14 Risk-Free Rate 3.70% given 15 Equity Risk Premium 5.00% given R-m - R-f 16 Beta 1.20 given 17 Cost of Equity 9.72% b11+(b13*b12) k-e = R-f + [B x (R-m - R-f)] BT Weight of equity 82% 1-b8 e + dte 19 20 Weighted-Average Cost of Capital 8.75% (b8*b7)+(b15*b14) (k-d x wt-d)+(k-ex wt-e 21 22 Q1. Find the sources of the numbers entered in B8, B9, and B11 and list them. 23 24 25 26 27 28 29 30 Q1b. Find the sources of the numbers entered in B14, B15, and B16 and list them. 31 HINT: Case Exhibit 4 lists, among other information, betas for three peers of Flash Memory. 32 B15 is assumed, but explain what CFW says about the foibles of the 'risk premium', AKA 'equity risk premium'. 33 34 35 36The Flash Memory template below is much shorter but contains the same information. 10 base year 11 ($000s) 2010 2011 2012 2013 2014 2015 12 13 Investment in equipment $2,200 14 Net working capital required (total from balance sheet each year) $5,648 $7,322 $7,322 $2,877 $1,308 15 Investment in net working capital -$5,648 -$1,674 SO $4,446 $1,569 $1,308 16 Sales $21,600 $28,000 $28,000 $11,000 $5,000 17 Cost of goods sold (includes depreciation) $17,064 $22,120 $22,120 $8,690 $3,950 18 Research & development $0 SO SO $0 SO 19 Selling, general & administrative $1,806 $2,341 $2,341 $920 5418 20 Launch promotion $300 SO SO SO Income before income taxes $2,430 $3,539 $3,539 $1,390 $632 Income taxes $972 $1.416 $1,416 $556 $25 Net income $1,458 $2,124 $2,124 $834 $379 Depreciation $440 440 $440 $440 $440 25 Cash flow from operations $1,898 $2,564 $2,564 $1,274 $819 Total cash flow $7,848 $225 $2,564 $7,009 $2,843 $2,127 Cumulative total cash flow $7,848 $7,624 -$5,060 $1,949 $4,792 $6,919 28 29 k-wac Enter it from previous tab 30 NET PRESENT VALUE (NPV) 31 PROFITABILITY INDEX (PI) 32 INTERNAL RATE OF RETURN (IRR) 33 PAYBACK PERIOD (PP) By inspection 34 35 Q2a. Which rows contain balance sheet information? Which rows contain income statement information? 36 57 38 39 40 41 42 Q2b. Explain the difference between the yellow-highlighted row 14 and row 15. In addition to digesting the details of Investment Opportunity (page 4), the 5th paragraph on page 2 and the 3rd paragraph on page 3 offer background on working capital. 45 48 49 50 51 Q2c. Explain the difference between rows 25 and 26. 52 57 58 59 Q2d. Explain the difference between rows 26 and 27. 60 61 62 63 64 65 66 QZe. Enter the appropriate formula in B30, B31, and B32, and the correct value in B33. Q2f. Recommend either accepting or rejecting the project, and explain your reasoning. Cite specific numbers. 68 69
