Pharma Biotech Corporation 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 variety of food products. DHA stands for docosahexaenoic 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, the eyes, and the immune system. Unfortunately, it is 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 Biotechs initial DHA product was designed as an additive to dairy products and yogurt. For example, the ventures 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 2018. Income statement and balance sheet results for 2019, the first full year of operations, have been prepared.

Pharma Biotech, however, is concerned about forecasting its financial statements for next year because it is uncer-tain about the amount of additional financing for assets that will be needed as Pharma Biotech Corporation the venture ramps up sales. 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 of the chocolate candies, but they will also benefit from the DHA enhancement. Because this is anticipated to be a blockbuster new product, sales are anticipated to increase 50 percent next year (2020), even though the new product will come online in midyear. An additional 80 percent increase in sales is expected the following year (2021).

PHARMA BIOTECH CORPORATION INCOME STATEMENT FOR DECEMBER 31, 2019 (THOUSANDS OF DOLLARS) Sales 15,000 Operating expenses -13,000 EBIT 2,000 Interest - 400 EBT 1,600 Taxes (40% rate) -640 Net income 960 Cash dividends (40% payout) -384 Added retained earnings 576 BALANCE SHEET AS OF DECEMBER 31, 2019 (THOUSANDS OF DOLLARS) Cash and marketable securities $ 1,000 Accounts payable Accounts receivable 2,000 Bank loan Inventories 2,200 Accrued liabilities Total current assets 5,200 Total current liabilities Long-term debt Common stock Fixed assets, net 6,800 Retained earnings Total assets $12,000 Total liabilities and equity $ 1,600 1,800 1,200 4,600 2,200 2,400 2,800 $12,000 Part A Pharma Biotech is interested in developing an initial "big picture" of the size of financing that might be needed to sup- port its rapid growth objectives for 2020 and 2021. A. Calculate the following financial ratios (as covered in Chapter 5) for Pharma Biotech for 2019: (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 2019 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 2020, using the formula or equation method presented in the chapter. D. Also, estimate the AFN using the equation method for Pharma Biotech for 2021. What will be the cumulative AFN for the two-year period