Diga Mem.Inc.

INTRODUCTION

DigaMem Inc is an Australian semiconductor corporation, founded in 1984.It was established as a research and development company to develop technology for use in semiconductor memory chip. Like other memory chip companies, DigaMem`s technology was designed to store data for electrical devices such as cell phones and computers.

Products of DigaMem Inc.:

1. Crystal Random Access Memory2.Advanced Memory Product

INDUSTRIAL ANALYSIS

Porters five factors:The semiconductor industry lives - and dies - by a simple creed: smaller, faster and cheaper. The benefit of being tiny is pretty simple: finer lines mean more transistors can be packed onto the same chip.

1. Threat of New Entrants.2. Power of Suppliers3. Power of Buyers4. Availability of Substitutes 5. Competitive Rivalry

PESTEL ANALYSIS

Strategic analysis is basically concerned with the structuring of the relationship between a business and its environment. The external environment which is dynamic and changing holds both opportunities and threats for the organizations.

1. Political Forces2. Economic Forces 3. Socio-Cultural Forces4. Technological forces5. Environmental forces6.Legal forces

RATIO ANALYSISDigaMemInc. 1997 1996 1995

CURRENT RATIO(CR) 1.36 3.11 2.56

QUICK RATIO(QR) 0.83 1.83 1.88

INVENTORY TURNOVER 2.87 4.28 5.2

DSO 84 Days 96 Days 32.39 Days

FIXED ASSET TURNOVER 1.61 2.27 1.84

TOTAL ASSET TURNOVER 0.66 0.99 0.79

DEBT RATIO 43.52% 29.89% 33.08%

TIE -22.66% -15.5% -7.42%

EBITDA -15.93% -6.48% 1.6%

PM -43% -18% 8%

BEP -29.39% -16.47% 5.01%

ROA -28.52% -18.06% -6.79%

ROE -50.51% -25.76% -10.15%

EPS 0.2336 0.1550 0.682

P/E -428.08 -6.4516 -14.651

CF PER SHARE -0.1651 -0.077 0.0147

P/CF -6.0569 -12.987 67.9728

BVPS 0.9988 0.9997 0.9999

M/B 100.12 100.03 99.93

DU PONT -23.24% -15.3% -6.35%

SWOT ANALYSISStrength: •Better fixed asset turnover & total asset turnover ratio.•Profitable. •Better than its competitorWeakness: •CRAM has incurred loss•Non reliable to estimate the cost. Opportunity: •Experienced. •Able to improve its profit margin. •Issues were more.Threats: •Competition with other companies.•Global or national economic•Merger with Hitachi of Japan.

RISK ANALYSIS

Business Risk: •Private placement. •Evaluate an initial public offering (IPO) to sell new share.•Try to promote its unprofitable product.

Financial Risk: •Simpson estimation.•Redemption of the senior notes maturity.•Sale off 50% of its stake in a design.

PROBLEM

1 .Digamem is mainly going through the financial crisis. As it is a semiconductor company it needs continuous improvement in its production and for this reason research is also very important factor for the company. So to continue its operation the company needed 27.3 million.2. The traditional sources of funding are drying up so the company needs to search for the new source of financing.3. The company’s CRAM division was incurring losses so they should take a decision whether to continue or discontinue this product division.4. In this major financial crisis the company couldn’t borrow money as its all the tangible assets were kept as a collateral for the original $7 million investment made to begin prototyping .So there is no option for the secured debt.

VALUATION_01Digamem can made itself public limited company by issue company share at a higher price to public and by accumulating money from selling the share they can invest that money into business.

Assume,

VALUATION_011998 1999 2000 2001 2002 2003 2004 2005 2006 2007

total revenue(salesx10%) 35412.338953.5342848.8847133.7751847.1557031.8662735.0569008.5575909.41 83500.351

less:cost of goods sold(35%) 12394.3113633.7414997.1116496.82 18146.519961.1521957.26 24152.126568.29 29225.12

gross profit 23017.9925319.7927851.7730636.9533700.6537070.7140777.7944856.4549341.12 54275.231

less:selling & administrative exp(sellx20%) 7082.467790.7068569.7779426.75410369.4311406.3712547.0113801.7115181.88 16700.07less:depreciation 3313 3255 2840 2427 2014 1601 1188 775 682 669less:R & D expendeture 12425 13825 14125 1478 1500 1680 1550 1520 1500 1472.5EBIT 197.53 449.0842316.996 17305.219817.2222383.3425492.7828759.7431977.24 35433.661

(-)TAX 59.26 135.32 695.1 1200.96 1895.16 2178.99 3462.83 4523.92 5543.17 6654.43

EBIT(1-TAX) 138.27 313.7641621.89616104.2417922.0620204.3522029.9524235.8226434.07 28779.231

(+)depreciation 3313 3255 2840 2427 2014 1601 1188 775 682 669

(-)investment in CAPEX 975.6 995.11 1015.01 1035.31 1056.02 1077.14 1098.68 1120.65 1143.06 1165.92

(-) increase in NWC 576.08 587.6 599.35 611.34 623.57 636.04 648.76 661.74 674.97 688.97

FCFF 1899.591986.0542847.53616884.5918256.4720092.1721470.5123228.4325298.04 27593.341

TERMINAL VALUE 333509.53

TERMINAL VALUE WITH FCFF 361102.87

VALUATION_01

Kd 0.091Kp 0.1522Ks 0.058Ke 0.073

amount weightdebt 0 0prefered stock 0 0common stock 59500000 1(+)IPO(182000X150) 27300000

86800000

WACC 0.073

1998 1999 2000 2001 2002 2003 2004 2005 2006 20071681.053 1555.372 1973.486 10355.63 9908.88 9650.642 9126.269 8737.604 8421.333 106376.7

PV OF FCFF 167787

PV OF FCFF 167787ADD: 181000

VALUE OF FIRM 348787LESS:DEBT 0

VALUE OF EQUITY 348787NO OF SHARE 777

PRICE OF SHARE 448.8893

VALUATION_02Digamem can issue preferred convertible stock. By selling preferred stock at high price and giving the buyer a convertible option can be good source of earning money.

Assume,

VALUATION_02

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

total revenue(salesx10%) 35412.3 38953.53 42848.88 47133.77 51847.15 57031.8662735.0569008.5575909.41 83500.351

less:cost of goods sold(35%) 12394.31 13633.74 14997.11 16496.82 18146.5 19961.1521957.26 24152.126568.29 29225.12

gross profit 23017.99 25319.79 27851.77 30636.95 33700.65 37070.7140777.7944856.4549341.12 54275.231

less:selling & administrative exp(sellx20%) 7082.46 7790.706 8569.777 9426.754 10369.43 11406.3712547.0113801.7115181.88 16700.07

less:depreciation 3313 3255 2840 2427 2014 1601 1188 775 682 669

less:R & D expendeture 12425 13825 14125 14780 15000 16800 15500 15200 15000 14725

EBIT 197.53 449.084 2316.996 4003.197 6317.219 7263.34111542.7815079.7418477.24 22181.161

(-)TAX 59.26 135.32 695.1 1200.96 1895.16 2178.99 3462.83 4523.92 5543.17 6654.43

EBIT(1-TAX) 138.27 313.764 1621.896 2802.237 4422.059 5084.351 8079.9510555.8212934.07 15526.731

(+)depreciation 3313 3255 2840 2427 2014 1601 1188 775 682 669

(-)investment in CAPEX 975.6 995.11 1015.01 1035.31 1056.02 1077.14 1098.68 1120.65 1143.06 1165.92

(-) increase in NWC 576.08 587.6 599.35 611.34 623.57 636.04 648.76 661.74 674.97 688.97

FCFF 1899.59 1986.054 2847.536 3582.587 4756.469 4972.171 7520.519548.43411798.04 14340.841

TERMINAL VALUE 348080.34

TERMINAL VALUE WITH FCFF 362421.18

VALUATION_02

Kd 0.091Kp 0.071Ks 0.058

amount weightdebt 0 0preferedstock(27300X1000) 27300000 0.979common stock 595000 0.021

27895000

WACC 0.070727

1998 1999 2000 2001 2002 2003 2004 2005 2006 20071681.0531 1555.372 1973.486 2197.268 2581.621 2388.226 3196.673 3591.737 3927.388 106765.06

PV OF FCFF 129857.9

PV OF FCFF 129857.9ADD:CASH 181000VALUE OF FIRM 310857.9LESS:DEBT 0VALUE OF EQUITY 310857.9NO OF SHARE 595PRICE OF SHARE 522.450252

VALUATION_03The company should close the product division which is incurring losses. But at a crisis moment company should only concentrate to those product which will give a considerable return .

Assume,

VALUATION_031998 1999 2000 2001 2002 2003 2004 2005 2006 2007

total revenue(salesx8%) 34768.44 37549.92 40553.91 43798.22 47302.08 51086.25 55173.14 59587 64353.96 69502.27

less:cost of goods sold(30%) 10430.53 11264.97 12166.17 13139.47 14190.62 15325.87 16551.94 17876.1 19306.19 20850.68

gross profit 24337.91 26284.94 28387.74 30658.75 33111.46 35760.37 38621.2 41710.9 45047.77 48651.59

less:selling & administrative exp(sellx15%) 5215.266 5632.487 6083.086 6569.733 7095.312 7662.937 8275.972 8938.049 9653.093 10425.34

less:depreciation 2813 2755 2340 1927 1514 1101 688 275 182 169

less:R & D expendeture 12425 13825 14125 14780 15000 16800 15500 15200 15000 14725

EBIT 3884.642 4072.453 5839.65 7382.022 9502.143 10196.43 14157.23 17297.85 20212.68 23332.25

(-)TAX 59.26 135.32 695.1 1200.96 1895.16 2178.99 3462.83 4523.92 5543.17 6654.43

EBIT(1-TAX) 3825.382 3937.133 5144.55 6181.062 7606.983 8017.445 10694.4 12773.93 14669.51 16677.82

(+)depreciation 2813 2755 2340 1927 1514 1101 688 275 182 169

(-)investment in CAPEX 975.6 995.11 1015.01 1035.31 1056.02 1077.14 1098.68 1120.65 1143.06 1165.92

(-) increase in NWC 576.08 587.6 599.35 611.34 623.57 636.04 648.76 661.74 674.97 688.97

FCFF 5086.702 5109.423 5870.19 6461.412 7441.393 7405.265 9634.96 11266.54 13033.48 14991.93

SALVAGE CRAM 1200

LESS:TAX ON CAPITAL GAIN 2000

TERMINAL VALUE 535426.1

TERMINAL VALUE WITH FCFF 550418

VALUATION_03

Kd 0.091Kp 0.071Ks 0.058

amount weightdebt 0 0prefered stock 0 0common stock 595000 1

595000

WACC 0.058

1998 1999 2000 2001 2002 2003 2004 2005 2006 20074501.506 4001.428 4068.336 3962.905 4038.89 3556.886 4095.442 4238.019 4338.646 162146.7

PV OF FCFF 198949

PV OF FCFF 198949ADD:CASH 181000

VALUE OF FIRM 379949LESS:DEBT 0

VALUE OF EQUITY 379949NO OF SHARE 595

PRICE OF SHARE 638.5697

VALUATION_04The company can issue convertible debt. It gives a company’s investors the right to exchange their debt for a fixed amount of series of common stock.

Assume,

VALUATION_04

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

total revenue(salesx10%) 35412.3 38953.53 42848.88 47133.77 51847.15 57031.86 62735.05 69008.55 75909.41 83500.35

less:cost of goods sold(35%) 12394.31 13633.74 14997.11 16496.82 18146.5 19961.15 21957.26 24152.1 26568.29 29225.12

gross profit 23017.99 25319.79 27851.77 30636.95 33700.65 37070.71 40777.79 44856.45 49341.12 54275.23

less:interest expence 1638 1638 1638 1638 1638 1638 1638 1638 1638 1638

less:selling & administrative exp(sellx20%) 7082.46 7790.706 8569.777 9426.754 10369.43 11406.37 12547.01 13801.71 15181.88 16700.07

less:depreciation 3313 3255 2840 2427 2014 1601 1188 775 682 669

less:R & D expendeture 12425 13825 14125 14780 15000 16800 15500 15200 15000 14725

EBIT -1440.47 449.084 2316.996 4003.197 6317.219 7263.341 11542.78 15079.74 18477.24 22181.16

(-)TAX 59.26 135.32 695.1 1200.96 1895.16 2178.99 3462.83 4523.92 5543.17 6654.43

EBIT(1-TAX) -1499.73 313.764 1621.896 2802.237 4422.059 5084.351 8079.95 10555.82 12934.07 15526.73

(+)depreciation 3313 3255 2840 2427 2014 1601 1188 775 682 669

(-)investment in CAPEX 975.6 995.11 1015.01 1035.31 1056.02 1077.14 1098.68 1120.65 1143.06 1165.92

(-) increase in NWC 576.08 587.6 599.35 611.34 623.57 636.04 648.76 661.74 674.97 688.97

FCFF 261.59 1986.054 2847.536 3582.587 4756.469 4972.171 7520.51 9548.434 11798.04 14340.84

TERMINAL VALUE 235645.3

TERMINAL VALUE WITH FCFF 249986.2

VALUATION_04

Kd 0.091Kp 0.071Ks 0.058

amount weightdebt 27300000 0.998prefered stock 0 0common stock 595000 0.000685

595000

WACC 0.090858

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007231.4956 1555.372 1973.486 2197.268 2581.621 2388.226 3196.673 3591.737 3927.388 73643.02

PV OF FCFF 95286.3

PV OF FCFF 95286.3ADD:CASH 181000VALUE OF FIRM 276286.3LESS:DEBT 27300VALUE OF EQUITY 248986.3NO OF SHARE 595PRICE OF SHARE 418.4644

COMPARETIVE ANALYSIS

VALUATION1

VALUATION2

VALUATION3

VALUATION4

PV OF FCFF 167787 129857.9 198949 95286.3

ADD:CASH 181000 181000 181000 181000

VALUE OF FIRM 348787 310857.9 379949 276286.3

LESS:DEBT 0 0 0 27300

VALUE OF EQUITY 348787 310857.9 379949 248986.3

NO OF SHARE 777 595 595 595

PRICE OF SHARE 448.8893 522.450252 638.5697 418.4644

CONCLUSION

THANK YOU.