The Wivern 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

docosahexanoic 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 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, Wivern Biotech, as well as several

competitors, have been able to grow algae and other plants that are rich in DHA. The resulting

chemical compounds are then used to enhance a variety of food products.

Wivern 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,

Wivern Biotech began operations in 2018. Income statements and balance sheet results for fiscal

year 2019, the first full year of operations have been prepared.

Wivern Biotech, however, is concerned about forecasting its financial statements fro the next

year because it is uncertain about the additional amount of financing of assets that will be needed

as the venture ramps up sales. The company expects to introduce a DHA product that can be

added to chocolate candies. Not only will consumers get the satisfaction of the taste of chocolate,

but they will also benefit from DHA enhancement. Since this is anticipated to be a blockbuster

new product, sales are anticipated to increase 50% next year (2020) even though the product will

come online in the middle of the year. An additional 80% increase in sales is expected the

following year (2021).

Wivern Biotech Corporation

Income Statement for Year Ending 12/31/2019

($000)

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

a) Estimate the additional funds needed (AFN) for 2020 using the equation method based on 2019 financial

statements. (Equation below)

b) Estimate the AFN for 2020 using the percent of sales method. Is it different from (a)? Why?

c) Prepare pro forma Income and Balance Sheet Statements for 2020 before obtaining any additional financing.

d) Prepare a second iteration of the financial statements assuming that the original 2020 estimate will be financed by

additional long term debt at 10% interest rate.

e) Prepare pro forma income statement, balance sheet and cash flow statement for 2020 again using the results of Part d.

f) Find the AFN for 2021.

f) Prepare projected income statement, balance sheet and cash flow statements for Wivern for 2021 using the percent of sales

method before obtaining any additional financing. What are the amounts of additional funds needed?