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Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Question
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.

Transcribed Image Text: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 Biotech's initial DHA product was designed as an additive 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 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).

Transcribed Image Text:PHARMA BIOTECH CORPORATION
INCOME STATEMENT FOR DECEMBER 31, 2019
(THOUSANDS OF DOLLARS)
Sales
15,000
Operating expenses
- 13,000
ЕBIT
2,000
Interest
- 400
EBT
1,600
Taxes (40% rate)
-640
Net income
960
Cash dividends (40% payout)
Added retained earnings
-384
576
BALANCE SHEET AS OF DECEMBER 31, 2019
(THOUSANDS OF DOLLARS)
Cash and 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
Common stock
2,400
Fixed assets, net
6,800
Retained earnings
2,800
Total assets
$12,000
Total liabilities and equity
$12,000
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