HOLA-KOLA (2)

HOLA –KOLA The Capital Budgeting Decision EXECUTIVE SUMMARY This case is about a Mexican company, named – Bebida Sol. The company is looking into the possibilities of launching a new product – HOLA KOLA. The company has been into the soft drinks market, since 1998. Mexico has the highest per capita consumption of carbonated soft drinks in the world (163 litres). Now, since Mexico has the highest rate of obesity, the owner, Mr. Antonio Ortega , sees a potential market of their new product. The product is supposed to be a low priced, zero-calorie carbonated soft drink. The company wishes to target the low and medium class population, as because, the branded low-calorie soda consumers were either from the middle or the high class. The rest usually consumed the regular, high sugar, carbonated soft drinks. Mr. Antonio is evaluating on various aspects, based on which, he would be in a position to take a decision, whether to invest in his new venture or not. His company has dramatical rise in sales over the past 3 years. Further, even without any addition to his business strategy, he has seen significant increase in the net profit margin. The company, having a solid financial resource, built over time, is set to take a call, based on the various Financial analysis, whether to invest or not. Based on these assumptions, Mr. Antonio has hired a marketing consultant, paying him a hefty 5 million pesos, shortly after his report submission, which took around 2 months to complete. Based on the report, the company will now evaluate the various problems which may arise during the business operations, and how would they possibly get solutions to the most relevant one. This would enable the company to take a final call.

PROBLEM IDENTIFICATION As per my observation, the following problems have been identified to be significant, as here under : 1. DEMAND UNCERTAINTY: Since the Mexican market has the highest obesity rate, therefore there seems to be an increase in demand for low-calorie sodas. The main consumers of these segment are the middle to upper class. The low class, which the BEBIDA SOL is targeting , basically consume the high –sugared carbonated soft drinks. The company has two assumptions to this : a) One, that they cannot afford the high priced branded low-calorie soft drinks. b) Two, that they lack awareness of the product, and therefore, are good with the idea of consuming the highsugared soft drinks. If point (a) is the case , then the company has reasons to cheer, else their investments may have high risks. 1 | Page

2. CANNIBALISATION: The company has a regular range of carbonated soft drinks, that consists regular colas carbonates and non- cola carbonates , such as lemon/lime or carbonates. The revenue from sales has dramatically risen from 642million pesos to 900million pesos over the last 3 years. The entry of the new product can significantly cannibalize their own to staggering 800,000 pesos of after-tax cash-flow per year. 3. OPPORTUNITY CASH: Mr. Antonio Ortega has a ready unoccupied annex, for which he recently got an offer of 60,000 pesos per year. The amount would obviously come to him without any further investment. On the other hand, the new venture would demand heavy capital investment, followed by the market risks. 4. IMPACT ON CASH FLOW: Mr. Pedro, the company’s general manager, proposed offering a longer collection , to let the grocers pay in 45 days, in place of the normal 30 days. As per him, this will motivate them to carry the new product and help the company to achieve higher sales revenue. On the other hand, they wish to remain steady with the company’s normal payment schedule to the sundry creditors. The accounts payable is usually settled in 36 days. This gap of 9 days will put stress on the cash-flow on the company. This proposal, along with the intention of keeping an inventory of 1month will involve additional working capital, which in turn will involve an interest for the working capital. All of these will put an impact on the company’s cash-flow. 5. IRRELEVANT COST: Mr. Pedro hired a consultant to do a market study after discussing the case with Mr. Antonio . The market survey cost the company 5 million pesos which Mr. Pedro had paid shortly, after the completion of the report. This cost cannot be taken as irrelevant ,as this is not part of the decision making part of the project. In fact, based on the report, the company will decide whether to move ahead or not. This cost, though a necessity for the decision process, is a significant cash outflow, even before the project has commenced.

ALTERNATIVE SOLUTIONS TO THE ABOVE PROBLEMS 1. DEMAND UNCERTAINTY - As per the projections given by the consultant, the revenue of 36 million Pesos is just 4% of the existing revenues of 900 million in the year 2011, which is ever increasing, due to the nature of the product. There was a need for a improvement of the product as per the needs of the consumer, and an early start to launch the new Zero Calorie product – line. There was a choice made available to the each type of consumer – People of low income group – the existing product, and people with income group – both the options 2 | Page

are available. Even for the health conscious consumers now, we had a product. The demand has been backed by the consultant’s report, and the uncertainty of the future demand of a new product, is the risk which is associated with high returns product. Higher the risk, higher the profit. 2. CANNIBALISATION: The 800000 Pesos of potential erosion is 5 % of the existing cash flows which is being absorbed by the new product as an indirect cost, which is 2% of the new product Turnover. Since the new product is giving a net margin of 19% without loan, 2% of cannibalisation cost can be absorbed easily. 3. OPPORTUNITY CASH: The Rental Income of 60000 Pesos a year is quite small as compared to the revenues to be earned from the new project. This will not be very crucial point in the decision making for launching the new project. 4. IMPACT ON CASH FLOW: Though there is a bit stress on the working Capital, but it is a part of the risk to be taken. The returns on the capital is quite high to absorb the cost of working capital. 5. IRRELEVANT COST: The Cost of research is done to assist the decision for the new product launch. It does not play any financial role in assisting the decision making. THE MAIN PROBLEM IN TAKING THE DECISION FOR THE NEW PRODUCT There are two options available to Antonio - whether he should go for the loan of 10000000 Pesos of Bank Loan at 16 %. Below we have analysed this problem with the help of calculations of profitability, NPV and IRR, whether he should go ahead with the loan or not.

3 | Page

HOLA KOLA -THE CAPITAL BUDGETING DECISION WITH LOAN 20% Years 0

1

2

3

4

5

Unit Selling price

0

5

5

5

5

5

Annual Sales (In Litres) 600000x 12 ( Volume)

0

Sales Revenue 7200000 36000000

100 %

7200000 3600000 0

100 %

(129600 00)

Total Revenue

0

Less: COGS Raw Material cost@ 1.8 Pesos /liter X 600000 x12

0 0

(1296000 0)

-36%

Overhead Expenses@1% of Sales

0

(360000)

-1%

Direct Labor Cost@1,80,000 peros/month X 12

0

(2160000) 2052000 0

-6%

Gross Profit

36000000

100 %

-36%

(1296000 0)

-36%

(12960000 )

-36%

(1296000 0)

-1%

-36%

(360000)

-1%

(360000)

-1%

(360000)

-1%

-6%

-6%

-6% 57%

(2160000) 2052000 0

-6%

57%

(2160000) 2052000 0

57%

-2%

(600000)

-2%

(600000)

-2%

57%

-2%

(600000)

-2%

(600000)

0

(600000)

Building Rental (Oppourtunity Cost)

0

(60000)

General Administrative & Selling Expenses

0

(300000)

-1%

(1600000) (1000000 0)

-4%

EBIT

36000000

57%

Energy Cost@50,000 peros/month X 12

Less: depreciation

36000000

(60000)

-28%

(300000) (128000 0) (100000 00)

7200000 100 %

(2160000) 2052000 0

0

7200000 100 %

(360000) (216000 0) 205200 00

Operating Expenses

Less : Interest on TL

7200000

(60000)

(60000)

(60000)

-1%

(300000)

-1%

(300000)

-1%

(300000)

-1%

-4%

-3%

-28%

(320000) (1000000 0)

-1%

-28%

(640000) (10000000 )

-2%

-28%

(960000) (1000000 0)

-28%

7960000

22%

8280000

23%

8600000

24%

8920000

25%

9240000

26%

Less: Tax@30%

0

2388000

7%

2484000

7%

2580000

7%

2676000

7%

2772000

8%

PAT

0

5572000

15%

16%

6020000

17%

6244000

17%

6468000

18%

Add:Depriciation

0

10000000

5796000 1000000 0

Total Operating Cash Flow (OCF) (Net Cash from Operating Activities)

0

15572000

1579600 0

4 | Page

10000000

16020000

10000000

16244000

10000000

16468000

Less:Erosion

0

(800000)

Net operating Cash after Erosion Investments (Machine with Installation Charges) Resale Value Receivables=(Sales/365) X Collection Period(45 Days) Inventories (One month raw material Cost) Payables=(Material cost /365) X Avg. Payment period(36 days) Net change in Working Capital requirement

4,00,00,000

0 1080000 0

FCFF NPV@20%

1,46,63,102 .94

NPV@16%

1,99,38,314 .53

IRR

36%

Payback period

2.26

5 | Page

14772000

(800000) 1499600 0

2%

(800000)

-2000000

-2000000

-2000000

-2000000

-2000000

4438356. 16

4438356. 16

4438356. 16

4438356.1 6

4000000 4438356. 16

1080000

1080000 (127824 7) 4240109. 59 22,40,11 0 1,72,36,1 10

1080000

1080000

1080000

(1278247) 4240109. 589

(1278247) 4240109.5 89

(1278247) 8240109. 589

22,40,110 1,74,60,1 10

22,40,110 1,76,84,11 0

62,40,110 2,19,08,1 10

15220000

2%

(800000) 15444000

0

1080000 3,89,20,000 3,89,20,000

Total Cash from CAPEX

2%

(1278247) 4240109. 589 22,40,110 1,70,12,1 10

2%

(800000) 15668000

2%

HOLA KOLA -THE CAPITAL BUDGETING DECISION WITHOUT LOAN

0

Years 2

1

Sales Revenue Unit Selling price Annual Sales (In Litres) 600000x 12 ( Volume)

0 0

5 7200000

Total Revenue Less: COGS

0 0

36000000

100 %

Raw Material cost@ 1.8 Pesos /liter X 600000 x12 Overhead Expenses@1% of Sales

0 0

(12960000 ) (360000)

36% -1%

Direct Labor Cost@1,80,000 peros/month X 12

0

(2160000) 2052000 0

Gross Profit Operating Expenses Energy Cost@50,000 peros/month X 12 Building Rental (Oppourtunity Cost) General Administrative & Selling Expenses

0 0 0 0

Less: depreciation

5

5 7200000

5 7200000

36000000

36000000

36000000

(12960000 ) (360000)

(12960000 ) (360000)

(1296000 0) (360000)

-6% 57 %

(1296000 0) (360000) (2160000 ) 2052000 0

(2160000) 2052000 0

(2160000) 2052000 0

(2160000) 2052000 0

(600000) (60000) (300000) (10000000 )

-2% 0% -1% 28%

(600000) (60000) (300000) (1000000 0)

(600000) (60000) (300000) (10000000 )

(600000) (60000) (300000) (10000000 )

(600000) (60000) (300000) (1000000 0)

27% 8%

9560000 2868000

9560000 2868000

9560000 2868000

9560000 2868000

19%

6692000 1000000 0

6692000

6692000

6692000

10000000

10000000

10000000

0

9560000 2868000

PAT

0

6692000

Add:Depriciation

0

10000000

6 | Page

4

5 7200000

EBIT Less: Tax@30%

5 7200000 3600000 0

3

Total Operating Cash Flow (OCF) (Net Cash from Operating Activities)

0

Less:Erosion

0

(800000)

Net operating Cash after Erosion Investments (Machine with Installation Charges) Resale Value Receivables=(Sales/365) X Collection Period(45 Days) Inventories (One month raw material Cost) Payables=(Material cost /365) X Avg. Payment period(36 days) Net change in Working Capital requirement

1669200 0

16692000

15892000 -5,00,00,000 0 0 1080000 0 1080000

Total Cash from CAPEX

-4,78,40,000

FCFF

-4,78,40,000

NPV@20%

2,82,62,875.13

NPV@16% IRR Payback period

3,57,70,706.70 44% 1.96

-2%

(800000) 1589200 0

16692000 (800000) 15892000

16692000 (800000) 15892000

0

0

0

0

4438356.1 64 1080000

4438356. 16 1080000 (1278247 ) 4240109. 59 84,80,21 9 2,43,72,2 19

4438356.1 64 1080000

4438356.1 64 1080000

(1278247) 4240109.5 89

(1278247) 4240109.5 89

84,80,219 2,43,72,21 9

84,80,219 2,43,72,21 9

(1278247) 4240109.5 89 84,80,219 2,43,72,21 9

16692000 (800000) 15892000 0 4000000 4438356.1 64 1080000 (1278247) 8240109.5 89 1,64,80,21 9 3,23,72,21 9

CONCLUSION To Conclude, there is no doubt the project is viable as per the calculations and has a positive NPV. In addition there is a social cause as well, where the company is selling a product which is not increasing the Obesity rate in the Country. Early start will also help the Company to create a Brand Image in the coming years. 7 | Page

The Profitability of the product and the Cash inflow is taking care of all the expense (Cannibalisation Cost, Opportunity Cost) Thus Antonio should go ahead with the project without Loan which is helping him to recover the capital cost in lesser period and in addition the IRR is also higher by 8%. The Company is also earning higher net profit @ 19% as compared to the existing Product’s net profit of 5.6% in 2011. Proposal w/o Loan

Proposal with Loan

17%

13%

NPV@20%

2,82,62,875.1 3

1,46,63,102.9 4

NPV@16% IRR Payback period

3,57,70,706.7 0 44% 1.96

1,99,38,314.5 3 36% 2.26

Particlars Net Profit % after cannibalistion

8 | Page

Flash Memory, Inc. Exhibit 1 Actual and Forecasted Financial Statements Assuming No Investment in New Product Line, No Sale of New Common Stock, and All Borrowings at 9.25% Income Statement ($000s except EPS) Actual

Sales - YOY growth Cost of goods sold - % of sales Gross margin Research and development - % of sales Selling, general and administrative - % of sales Operating income Interest expense - Interest rate % Other income (expenses) Income before income taxes

9 | Page

Forecast

2007

2008

2009

2010

2011

2012

$77,131 $62,519 81.1% $14,612

$80,953 5.0% $68,382 84.5% $12,571

$89,250 10.2% $72,424 81.1% $16,826

$1,20,000 34.5% $97,320 81.1% $22,680

$1,44,000 20.0% $1,16,784 81.1% $27,216

$1,44,000 0.0% $1,16,784 81.1% $27,216

$3,726 4.8% $6,594 8.5% $4,292

$4,133 5.1% $7,536 9.3% $902

$4,416 4.9% $7,458 8.4% $4,952

$6,000 5.0% $10,032 8.4% $6,648

$7,200 5.0% $12,038 8.4% $7,978

$7,200 5.0% $12,038 8.4% $7,978

$480

$652

$735

-$39

-$27

-$35

$937 9.25% -$50

$1,323 9.25% -$50

$1,565 9.25% -$50

$3,773

$223

$4,182

$5,661

$6,604

$6,363

Income taxes - % of income before taxes Net income Earnings per share

$1,509 40.0% $2,264

$89 39.9% $134

$1,673 40.0% $2,509

$2,264

$2,642

$2,545

$3,396

$3,963

$3,818

$1.52

$0.09

$1.68

$2.28

$2.66

$2.56

Exhibit 1 (continued) Balance Sheet ($000s except shares outstanding and book value per share) Actual

Cash - % of sales Accounts receivable - Days of sales Inventories - Days of COGS Prepaid expenses - % of sales Total current assets Property, plant & equipment at cost Less: Accumulated depreciation Net property, plant & equipment Total assets 10 | P a g e

Forecast

2007

2008

2009

2010

2011

2012

$2,536 3.3% $10,988 33 $9,592 56 $309 0.3% $23,425

$2,218 2.7% $12,864 33 $11,072 59 $324 0.2% $26,478

$2,934 3.3% $14,671 37 $11,509 58 $357 0.2% $29,471

$3,960 3.3% $19,726 60 $13,865 52 $480 0.4% $38,031

$4,752 3.3% $23,671 60 $16,638 52 $576 0.4% $45,637

$4,752 3.3% $23,671 60 $16,638 52 $576 0.4% $45,637

$5,306 $792 $4,514

$6,116 $1,174 $4,942

$7,282 $1,633 $5,649

$8,182 $2,179 $6,003

$9,082 $2,793 $6,290

$9,982 $3,474 $6,508

$27,939

$31,420

$35,120

$44,034

$51,926

$52,145

Accounts payable - Days purchases Notes payable

$3,084 30 $6,620

$4,268 38 $8,873

$3,929 33 $10,132

$4,799 30 $14,306

$5,759 30 $16,914

$5,759 30 $13,325

Accrued expenses

$563

$591

$652

$876

$1,051

$1,051

Income taxes payable - % of taxes Other current liabilities - % of sales Total current liabilities

$151 10% $478 0.6% $10,896

$9 10% $502 0.6% $14,243

$167 10% $554 0.6% $15,434

$226 10% $744 0.6% $20,951

$264 10% $893 0.6% $24,881

$255 10% $893 0.6% $21,282

Common stock at $0.01 per share par value Paid in capital in excess of par value Retained earnings Total shareholders' equity

$15 $7,980 $9,048 $17,043

$15 $7,980 $9,182 $17,177

$15 $7,980 $11,691 $19,686

$15 $7,980 $15,087 $23,082

$15 $7,980 $19,050 $27,045

$15 $7,980 $22,868 $30,863

Total liabilities & shareholders' equity

$27,939

$31,420

$35,120

$44,034

$51,926

$52,145

14,91,662

14,91,662

14,91,662

14,91,662

14,91,662

14,91,662

Book value per share

$11.43

$11.52

$13.20

$15.47

$18.13

$20.69

Return on equity Interest coverage ratio (times) Notes payable / accounts receivable Notes payable / shareholders' equity Total liabilities / shareholders' equity

13.3% 8.9 60.2% 38.8% 63.9%

0.8% 1.4 69.0% 51.7% 82.9%

12.7% 6.7 69.1% 51.5% 78.4%

14.7% 7.1 72.5% 62.0% 90.8%

14.7% 6.0 71.5% 62.5% 92.0%

12.4% 5.1 56.3% 43.2% 69.0%

Number of shares outstanding

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Flash Memory, Inc. Exhibit 2 Calculation of Cost of Capital Step 1 - Calculation of asset Beta for the industry using market value weights:

Micron Technology D = book value of debt (4-30-2010) BVE = book value of equity (4-30-2010) MVE = market value of equity (4-30-2010)

$2,760 $5,603 $7,925

βE = equity or levered beta βA = asset or unlevered beta SanDisk Corporation D = book value of debt (4-30-2010) BVE = book value of equity (4-30-2010) MVE = market value of equity (4-30-2010)

βE = equity or levered beta βA = asset or unlevered beta 12 | P a g e

74.2% 1.25 1.03

$975 $4,157 $9,135

βE = equity or levered beta βA = asset or unlevered beta STEC, Inc. D = book value of debt (4-30-2010) BVE = book value of equity (4-30-2010) MVE = market value of equity (4-30-2010)

25.8%

9.6% 90.4% 1.36 1.28

$0 $276 $699

0.0% 100.0% 1.00 1.00

Average βA for the industry

Exhibit 2 (continued)

1.10

Calculation of Cost of Capital

Step 2 - Calculation of cost of equity capital for Flash Memory, Inc.: Current weights of debt and equity D = value of bank debt from 2009 balance sheet E = value of equity at $25 per share

$10,132 $37,292

21.4% 78.6%

Since Flash is at the limit of its current loan agreement, management believes this is a higher proportion of debt finance than optimal. As stated in the case, management has set target capital structure weights equal to 18% debt and 82% equity.

Flash Memory, Inc. D = target value of debt E = target value of equity βA = average asset beta for the industry βE = equity or levered beta

18.0% 82.0% 1.10 1.25

Cost of equity capital for Flash Ke = Rf + βE x Market Risk Premium Rf = risk-free rate of return βE = Flash's equity or levered beta Assumed market risk premium 13 | P a g e

3.70% 1.25 6.00%

Ke = Flash's cost of equity capital

11.20%

Step 3 - Calculation of cost of capital for Flash Memory, Inc.: K = Wd x Kd x (1 - T) + We x Ke Wd = weight of debt in Flash's capital structure Kd = Flash's cost of debt capital (a) T = Flash's income tax rate We = weight of equity in Flash's capital structure Ke = Flash' cost of equity capital K = Flash's cost of capital

18.00% 7.25% 40.00% 82.00% 11.20% 9.96%

(a) at 18% weight of debt Flash will be within the 70% of accounts receivable limit of the existing loan agreement, thus the 7.25% cost of debt capital. If Flash was over this 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.

Flash Memory, Inc. 14 | P a g e

Exhibit 3 Net Present Value of Investment in New Product Line ($000s) 2011

2012

2013

2014

2015

Total

Investment in equipment

2010 -$2,200

Net working capital required to support sales - % of sales Investment in net working capital (the year-on-year change)

$5,648 26.15% -$5,648

$7,322 26.15% -$1,674

$7,322 26.15% $0

$2,877 26.15% $4,446

$1,308 26.15% $1,569

$0 26.15% $1,308

$0

$21,600 $17,064 79.00% $0 $1,806 8.36% $300 $2,430 $972 $1,458 $440 $1,898

$28,000 $22,120 79.00% $0 $2,341 8.36% $0 $3,539 $1,416 $2,124 $440 $2,564

$28,000 $22,120 79.00% $0 $2,341 8.36% $0 $3,539 $1,416 $2,124 $440 $2,564

$11,000 $8,690 79.00% $0 $920 8.36% $0 $1,390 $556 $834 $440 $1,274

$5,000 $3,950 79.00% $0 $418 8.36% $0 $632 $253 $379 $440 $819

$225

$2,564

$7,009

$2,843

$2,127

Sales Cost of goods sold (includes equipment depreciation) - % of sales Research & development Selling, general & administrative - % of slaes Launch promotion Income before income taxes Income taxes @ 40% Net income Depreciation of equipment @ 20% SLM Cash flow from operations Total cash flow NPV @ cost of capital IRR MIRR

-$7,848 $3,014 21.9% 17.3%

Cost of capital

9.96%

15 | P a g e

$2,200

Flash Memory, Inc. Exhibit 4 Change in Forecasted Financial Statements due to Acceptance of Investment in New Product Line Financial Statement Account ($000s) Actual 200 200 200 7 8 9

Sales Cost of goods sold (includes equipment depreciation) Research and development Selling, general and administrative (includes launch) Increase in operating income Cash (3.3% of sales) Accounts receivable (60 DSO) 16 | P a g e

Forecast 2010

2011

2012

$21,6 00

$28,000

$17,0 64

$22,120

$0

$0

$2,10 6 $2,43 0

$2,341 $3,539

$713

$924

$3,55 1

$4,603

Inventories (52 days of COGS) Prepaid expenses (0.4% of sales) Net property, plant & equipment Accounts payable (60 days of purchases) Accrued expenses (0.73% of sales) Other current liabilities (0.62% of sales)

$2,43 1 $2,20 0

$3,151

$86 $1,76 0

$112 $1,320

$842

$1,091

$158

$204

$134

$174

26.15 %

26.15%

For informational purposes only:

NWC % of sales

17 | P a g e

Exhibit 5 (continued) Balance Sheet ($000s except shares outstanding and book value per share)

2010

Forecast 2011

2012

$2,934 $14,671 $11,509 $357 $29,471

$3,960 $19,726 $13,865 $480 $38,031

$5,465 $27,222 $19,069 $662 $52,418

$5,676 $28,274 $19,789 $688 $54,427

$6,116 $1,174 $4,942

$7,282 $1,633 $5,649

$10,382 $2,179 $8,203

$11,282 $3,233 $8,050

$12,182 $4,354 $7,828

$27,939

$31,420

$35,120

$46,234

$60,467

$62,255

Accounts payable Notes payable Accrued expenses Income taxes payable Other current liabilities Total current liabilities

$3,084 $6,620 $563 $151 $478 $10,896

$4,268 $8,873 $591 $9 $502 $14,243

$3,929 $10,132 $652 $167 $554 $15,434

$4,799 $16,506 $876 $226 $744 $23,151

$6,601 $22,897 $1,209 $353 $1,027 $32,086

$6,850 $18,719 $1,256 $374 $1,066 $28,265

Common stock at $0.01 per share par value Paid in capital in excess of par value Retained earnings Total shareholders' equity

$15 $7,980 $9,048 $17,043

$15 $7,980 $9,182 $17,177

$15 $7,980 $11,691 $19,686

$15 $7,980 $15,087 $23,082

$15 $7,980 $20,386 $28,381

$15 $7,980 $25,995 $33,990

Cash Accounts receivable Inventories Prepaid expenses Total current assets Property, plant & equipment at cost Less: Accumulated depreciation Net property, plant & equipment Total assets

18 | P a g e

2007

Actual 2008

2009

$2,536 $10,988 $9,592 $309 $23,425

$2,218 $12,864 $11,072 $324 $26,478

$5,306 $792 $4,514

Total liabilities & shareholders' equity

$27,939

$31,420

$35,120

$46,234

$60,467

$62,255

14,91,662

14,91,662

14,91,662

14,91,662

14,91,662

14,91,662

Book value per share

$11.43

$11.52

$13.20

$15.47

$19.03

$22.79

Return on equity Interest coverage ratio (times) Notes payable / accounts receivable Notes payable / shareholders' equity Total liabilities / shareholders' equity

13.3% 8.9 60.2% 38.8% 63.9%

0.8% 1.4 69.0% 51.7% 82.9%

12.7% 6.7 69.1% 51.5% 78.4%

14.7% 7.1 83.7% 71.5% 100.3%

18.7% 6.8 84.1% 80.7% 113.1%

16.5% 5.4 66.2% 55.1% 83.2%

Number of shares outstanding

19 | P a g e

Flash Memory, Inc. Exhibit 6 Actual and Forecasted Financial Statements Assuming Acceptance of Investment in New Product Line, Sale of 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)

2010

Forecast 2011

2012

$89,250 $72,424 $16,826

$1,20,000 $97,320 $22,680

$1,65,600 $1,33,848 $31,752

$1,72,000 $1,38,904 $33,096

$4,133 $7,536 $902

$4,416 $7,458 $4,952

$6,000 $10,032 $6,648

$7,200 $14,144 $10,408

$7,200 $14,379 $11,517

$480 -$39

$652 -$27

$735 -$35

$735 -$50

$687 -$50

$1,112 -$50

Income before income taxes

$3,773

$223

$4,182

$5,863

$9,671

$10,355

Income taxes Net income

$1,509 $2,264

$89 $134

$1,673 $2,509

$2,345 $3,518

$3,868 $5,802

$4,142 $6,213

$1.52

$0.09

$1.68

$1.96

$3.24

$3.47

Sales Cost of goods sold Gross margin Research and development Selling, general and administrative Operating income Interest expense Other income (expenses)

Earnings per share

Exhibit 6 (continued) 20 | P a g e

2007

Actual 2008

2009

$77,131 $62,519 $14,612

$80,953 $68,382 $12,571

$3,726 $6,594 $4,292

Balance Sheet ($000s except shares outstanding and book value per share)

2010

Forecast 2011

2012

$2,934 $14,671 $11,509 $357 $29,471

$3,960 $19,726 $13,865 $480 $38,031

$5,465 $27,222 $19,069 $662 $52,418

$5,676 $28,274 $19,789 $688 $54,427

$6,116 $1,174 $4,942

$7,282 $1,633 $5,649

$10,382 $2,179 $8,203

$11,282 $3,233 $8,050

$12,182 $4,354 $7,828

$27,939

$31,420

$35,120

$46,234

$60,467

$62,255

Accounts payable Notes payable Accrued expenses Income taxes payable Other current liabilities Total current liabilities

$3,084 $6,620 $563 $151 $478 $10,896

$4,268 $8,873 $591 $9 $502 $14,243

$3,929 $10,132 $652 $167 $554 $15,434

$4,799 $9,476 $876 $235 $744 $16,130

$6,601 $15,338 $1,209 $387 $1,027 $24,561

$6,850 $10,550 $1,256 $414 $1,066 $20,136

Common stock at $0.01 per share par value Paid in capital in excess of par value Retained earnings Total shareholders' equity

$15 $7,980 $9,048 $17,043

$15 $7,980 $9,182 $17,177

$15 $7,980 $11,691 $19,686

$18 $14,877 $15,209 $30,104

$18 $14,877 $21,012 $35,907

$18 $14,877 $27,224 $42,119

Total liabilities & shareholders' equity

$27,939

$31,420

$35,120

$46,234

$60,467

$62,255

Cash Accounts receivable Inventories Prepaid expenses Total current assets Property, plant & equipment at cost Less: Accumulated depreciation Net property, plant & equipment Total assets

21 | P a g e

2007

Actual 2008

2009

$2,536 $10,988 $9,592 $309 $23,425

$2,218 $12,864 $11,072 $324 $26,478

$5,306 $792 $4,514

Number of shares outstanding

14,91,662

14,91,662

14,91,662

17,91,662

17,91,662

17,91,662

Book value per share

$11.43

$11.52

$13.20

$16.80

$20.04

$23.51

Return on equity Interest coverage ratio (times) Notes payable / accounts receivable Notes payable / shareholders' equity Total liabilities / shareholders' equity

13.3% 8.9 60.2% 38.8% 63.9%

0.8% 1.4 69.0% 51.7% 82.9%

12.7% 6.7 69.1% 51.5% 78.4%

11.7% 9.1 48.0% 31.5% 53.6%

16.2% 15.1 56.3% 42.7% 68.4%

14.8% 10.4 37.3% 25.0% 47.8%

Flash Memory, Inc. 22 | P a g e

Exhibit 7 Summary Statistics

Earnings per share Interest coverage ratio (times) Return on equity Notes payable / accounts receivable Notes payable / shareholders' equity Total liabilities / shareholders' equity Notes payable (000s)

Earnings per share Interest coverage ratio (times) Return on equity Notes payable / accounts receivable Notes payable / shareholders' equity Total liabilities / shareholders' equity Notes payable (000s) 23 | P a g e

2010

No Investment in New Product Line Sell No New Stock Borrow at 9.25% 2011

2012

$2.28 7.1 14.7%

$2.66 6.0 14.7%

$2.56 5.1 12.4%

72.5%

71.5%

56.3%

62.0%

62.5%

43.2%

90.8% $14,306

69.0% $13,325

2010

92.0% $16,914 Invest in the New Product Line 2011

$2.28 7.1 14.7%

$3.55 6.8 18.7%

$3.76 5.4 16.5%

83.7%

84.1%

66.2%

71.5%

80.7%

55.1%

100.3% $16,506

113.1% $22,897 Invest in the New Product

83.2% $18,719

2012

Line

Earnings per share Interest coverage ratio (times) Return on equity Notes payable / accounts receivable Notes payable / shareholders' equity Total liabilities / shareholders' equity Notes payable (000s)

24 | P a g e

2010

2011

2012

$1.96 9.1 11.7%

$3.24 15.1 16.2%

$3.47 10.4 14.8%

48.0%

56.3%

37.3%

31.5%

42.7%

25.0%

53.6% $9,476

68.4% $15,338

47.8% $10,550