[SOLVED] The Pharma Biotech Corporation spent several years

The Pharma Biotech Corporation spent several years working on developing a DHA product that can be used to provide a “fatty acid” supplement to a whole variety of food products. DHA stands for docsahexaenoic acid, an omega-3 fatty acid found naturally in cold water fish. The benefits of fatty fish oil have been cited in studies of the brain, eyes, and the immune system. Unfortunately, it is both difficult to consume enough fish to get the benefits of DHA and most individuals might be concerned about the taste consequences associated with adding fatty fish oil to eggs, ice cream, or chocolate candy. To counter these constraints, Pharma Biotech and several competitors have been able to grow algae and other plants that are rich in DHA. The resulting chemical compounds then are used to enhance a variety of food products.
Pharma Biotech’s initial DHA product was designed as additives to dairy products and yogurt. For example, the venture’s DHA product was added to cottage cheese and fruit-flavored yogurts to enhance the health benefits of those products. After the long product development period, Pharma Biotech began operations in 2015. Income statement and balance sheet results for 2016, the first full year of operations, have been prepared.
Pharma Biotech, however, is concerned with forecasting its financial statements for next year because it is uncertain as to the amount of additional financing of assets that will be needed as the venture ramps up sales next year. Pharma Biotech expects to introduce a DHA product that can be added to chocolate candies. Not only will consumers get the satisfaction of the taste chocolate candies they will benefit from the DHA enhancement. Since this is expected to be a “block buster” new product, sales are expected to increase 50 percent next year (2017) even though the new product will come on line in mid-year. An additional 80 percent increase in sales is expected the following year (2018).
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Pharma Biotech Corporation
Income statement for December 31, 2016
(Thousands of Dollars)
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Sales $15,000
Operating expenses -13,000
EBIT 2,000
Interest 400
EBT 1,600
Taxes (40%) 640
Net income 960

Cash dividends (40%) 384
Added retained earnings $576

Pharma Biotech Corporation
balance sheet as of December 31, 2016
(Thousands of Dollars) __________________________________________________________________
Cash & marketable securities $ 1,000 Accounts payable $ 1,600
Accounts receivable 2,000 Bank Loan 1,800
Inventories 2,200 Accrued liabilities 1,200
Total current assets 5,200 Total current liabilities 4,600
Long-term debt 2,200
Fixed assets, net 6,800 Common stock 2,400
Total assets $12,000 Retained earnings 2,800
Total liabilities & equity $12,000

Pharma Biotech is interested in developing an initial “big picture” of the size of financing that might be needed to support its rapid growth objectives for 2017 and 2018.
A. Calculate the following financial ratios (as covered in Chapter 5) for Pharma Biotech for 2016:
(a) net profit margin,
(b) sales-to-total-assets ratio,
(c) equity multiplier, and
(d) total-debt-to-total-assets. Apply the return on assets and return on equity models. Discuss your observations.
B. Estimate Pharma’s sustainable sales growth rate based on its 2016 financial statements. [Hint: you need to estimate the beginning of period stockholders’ equity based on the information provided.] What financial policy change might Pharma Biotech make to improve its sustainable growth rate? Show your calculations.
C. Estimate the additional funds needed (AFN) for 2017, using the formula or equation method presented in the chapter.
D. Also, estimate the AFN using the equation method for Pharma Biotech for 2018. What will be the cumulative AFN for the two-year period?

Question: The Pharma Biotech Corporation spent several years