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.

Part A
Pharma Biotech is interested in developing an initial €œbig picture€ of the size of financing that might be needed to support its rapid growth objectives for 2011 and 2012.
A. Calculate the following financial ratios for Pharma Biotech for 2010:
(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 2010 financial statements. 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 2011, using the formula or equation method presented in the chapter.
D. Also, estimate the AFN using the equation method for Pharma Biotech for 2012. What will be the cumulative AFN for the twoyear period?

Part B
Pharma Biotech is seeking your assistance in preparing its projected financial statements using the percent-of-sales method. Initial projected financial statements can be prepared by hand using a financial calculator or by constructing spreadsheet-based solutions.
A. Prepare a projected income statement for 2011 for Pharma Biotech before obtaining any additional financing.
B. Prepare a projected balance sheet for 2011 for Pharma Biotech before obtaining any additional financing.
C. Based on your projected balance sheet for Pharma Biotech for 2011, what is your estimate of the additional funds needed? Why does the AFN from your initial percent-of-sales projected financial statements differ from the AFN estimated using the formula method in Item C above?
D. Prepare a projected statement of cash flows for Pharma Biotech for 2011.

Part C
The following tasks or challenges are best handled by setting up spreadsheet-based methods projecting financial statements.
A. Prepare projected income statements, balance sheets, and statements of cash flows for Pharma Biotech for 2012 that build upon the projections for 2011 prepared in Part B above. What is the cumulative (2011 and 2012) amount of additional funds needed?
B. Calculate the total-debt-to-total assets ratio and the equity multiplier ratio assuming the cumulative AFN is financed with debt funds. How would these ratios compare with the same ratios calculated for 2010 in Item Aabove?

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PHARMA BIOTECH CORPORATION INCOME STATEMENT FOR DECEMBER 31, Sales Operating expenses EBIT Interest EBT Taxes (40% rate) Net income Cash dividends (40% payout) Added retained earnings 2010 (THOUSANDS OF DOLLARS) 15,000 -13,000 2,000 400 1,600 640 960 -384 576 PHARMA BIOTECH CORPORATION BALANCE SHEET AS OF DECEMBER 31, 2010 (THOUSANDS OF DOLLARS) 1,000 2,000 2,200 5,200 1,600 1,800 1,200 4,600 2,200 2,400 2,800 $12,000 Cash and marketable securities Accounts receivable Inventories Accounts payable Bank loan Accrued liabilities Total current liabilities Long-term debt Common stock Retained earnings Total liabilities and equity Total current assets Fixed assets, net Total assets 6,800 12,000