The GENENTECH CORPORATION spent several years working on developing a DHA produc
ID: 2650920 • Letter: T
Question
The GENENTECH 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, Genentech 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.
Genentech'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, Genentech began operations in 2013. Income statement and balance sheet results for 2014, the first full year of operations, have been prepared.
Genentech, 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. Genentech 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 (2015) even though the new product will come on line in mid-year. An additional 80 percent increase in sales is expected the following year (2016).
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GENENTECH CORPORATION
Income Statement for December 31, 2014
(Thousands of Dollars)
__________________________________
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
GENENTECH CORPORATION
Balance Sheet as of December 31, 2014
(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 ________________________________________________________________________
A.Estimate the additional funds needed (AFN) for 2014, using the formula method based on 'percent of sales' relationships.
B.Estimate the AFN for Genentech for 2015.
C.Prepare pro forma income and balance sheet statements for 2014 before obtaining any additional financing. Why does the AFN from the spreadsheet projections differ from the AFN estimated in Part A?
D.Prepare a second iteration of your pro forma financial statements for 2014 if the initial AFN estimate is to be financed by additional long-term funds at a 10 percent interest rate.
E.Prepare pro forma financial statements for 2015 that build on to the pro forma results obtained in Part D.
F. Prepare projected income statements, balance sheets, and statements of cash flow for Genentech for 2014 and 2015 before obtaining of any additional financing. What are the amounts of additional funds needed?
G. Assume that sales are expected to grow at 100 percent in 2016 (over the 2015 sales level), 50 percent in 2017, and 20 percent in 2018. Extend your projected financial statements prepared in Part E to include years 2016, 2017, and 2018. What will be the maximum amount of additional funds needed during your five-year forecast?
H. Assume that you will acquire the amount funds needed in Part F by selling or issuing more common stock and by borrowing from lenders at a 10 percent interest rate. Prepare a second round of projected five-year financial statements showing that the initial financing needed will be obtained equally each year by issuing new stock (50 percent) and by borrowing from lenders (50 percent).
Explanation / Answer
Solution -
expenses are taken as % Sales assuming all costs remain at a fixed percentage of Sales including Net Income
Balance Sheet accounts taken as % Sales are Cash, Accounts Receivable, Inventory, Accounts Payable & Fixed Assets . Interest expense kept as it is & Taxes, Dividends and Addition to Retained Earnings are expressed as a percentage of Taxable Income & Net Income respectively.
AFN is the difference between Partial Pro-Forma Total Assets and Partial Pro-Forma Total Liabilities and Owners' Equity
A. AFN need in 2015
B.Estimate the AFN for Genentech for 2015.
Similarly for 2016
Pro forma financial statements for 2015/2016 adding the financing amount and considering the Interest at 10%
Growth 50% GENENTECH CORPORATION ($ 000' ) 150% Income Statement 2014 2015 % of Sales Sales 15000 22500 Operating expenses 13000 86.7% 19500 % of sales EBIT 2000 3000 Interest 400 400 Interest not changed EBT 1600 2600 Taxes (40%) 640 1040 Net income 960 1560 Cash dividends (40%) 384 624 Added retained earnings 576 936 Balance Sheets Actual 2014 Cash & marketable securities 1000 6.7% 1500 % of sales Accounts Receivable 2000 13.3% 3000 % of sales Inventories 2200 14.7% 3300 % of sales Total Current Assets 5200 7800 Fixed Assets, Net 6800 45.3% 10200 % of sales Total Assets 12000 18000 Accounts Payable 1600 10.7% 2400 % of sales Bank Loan 1800 1800 $ of sales not applicable Accrued liabilities 1200 8.0% 1800 % of sales Total Current Liab 4600 6000 Long-Term Debt ** 2200 2200 Common Stock 2400 2400 Retained Earnings 2800 3736 Total Iiabilities & Equity 12000 14336 3664 AFN (Total Asset - Total Liabilities )Related Questions
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