Business Case Research-Johnson& Johnson

Business Case Research-Johnson& Johnson

The Need for Funding for the Company.

Johnson and Johnson Inc. requires more financing to support research and development. The company operates in an industry that needs constant innovation to respond to emerging complexities in treating various diseases. Therefore, investment in research and development will ensure new pharmaceutical products and medical equipment are developed. Additionally, the investment will ensure that the company remains relevant and competitive. Funding investment into research and development will entail self-funding and borrowing. The two funding sources have various requirements, as analyzed in the following section.

The Sources of Funding.

Self-funding refers to using capital from the company’s retained earnings to support investment activities. Self-funding only requires the approval of the board of management after considering the proposed investment activity. On the other hand, borrowing entails acquiring a long-term loan from a lending institution such as a credit institution or bank. Essentially, this funding option contains various requirements that Johnson and Johnson Inc. has to consider. First, borrowing requires collateral that stands for the amount borrowed. When the company fails to repay the loan, the collateral will be sold to recover the amount. Second, the company will require a positive credit standing to acquire a sufficient loan to support the intended project (Wasiuzzaman & Nurdin, 2019). Fortunately, Johnson and Johnson Inc. has a high rating in credit standings.

Associated Risks of these Funding Sources.

The two funding options identified have risks the company should consider before obtaining them. There is minimal risk regarding self-funding because the option has no liability.   However, the same cannot be said for the borrowing option. This is so because borrowing risks the company’s assets that will be used as collateral. If the company fails in its obligation to repay the loan, the assets will be confiscated. Additionally, the company risks obtaining a negative credit record if a default occurs when fulfilling the obligation. Also, loans consume the company’s capital in terms of interest repayment. The loan repayment includes interest charges that negatively influence the company’s overall cash balance.

Sources that Best Fit this Company

Considering the two options, self-funding is identified as the best option for funding their research and development programs. The selection of this option is based on the risks and requirements that the company needs to consider before adopting the option. As compared to the borrowing option, self-funding has minimal costs and risks. Additionally, Johnson and Johnson Inc. has a huge capital in their retained earnings that can be used to fund the intended project. In the fiscal year that ended in 2021, the retained earnings figure for the company was $17,941,000 (Yahoo Finance, 2022). Essentially, this proves the company’s ability to consider self-funding as the best alternative.

The Cost of Capital for Both Short-Term and Long-Term Funding Sources

The cost of the funding strategy is represented by Johnson and Johnson’s Inc.’s weighted cost of capital. The minimum rate of return that investors will expect for their investment in the company is referred to as the weighted cost of capital. It also describes the typical rate the company is predicted to pay its stockholders. For the most recent fiscal year, Johnson & Johnson Inc.’s weighted cost of capital was 6.1%. (GuruFocus, 2022). Because the self-funding approach was chosen, the WACC figure already accounts for its cost of capital as part of the total variable equity. It should be noted that this represents the expected cost of capital for both the long and short terms. The estimated APRs for the corporation for the previous four years are shown in the table below.

References

GuruFocus.(2022).https://www.gurufocus.com/term/wacc/NYSE:CAT/WACC- /Caterpillar#:~:text=As%20of%20today%20(2022%2D12,cost%20of%20capital%20is%  207.59%25.

Yahoo Finance. (2022). https://finance.yahoo.com/quote/CAT/balance-sheet?p=CAT

Wasiuzzaman, S., & Nurdin, N. (2019). Debt financing decisions of SMEs in emerging markets:  Empirical evidence from Malaysia. International Journal of Bank Marketing, 37(1), 258-  277.

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My company is Johnson& Johnson

Your company wants to acquire more funding and will need a business case to do so. This business case will be featured in your financial plan, which you will create next week. To get yourself prepared for developing the financial plan, create an outline of your business case in which you do the following:

Business Case Research-Johnson& Johnson

Determine why funding is needed for the company.
Determine the sources of funding. Consider self-funding, borrowing, equity, venture capital, etc.
Evaluate the requirements of each funding source you determine appropriate.
Analyze the associated risks of each funding source.
Decide which sources are the best fit for your company based on the requirements of each. Justify your decision.
Estimate the cost of capital for both short-term and long-term funding sources. Research current estimated APRs for your selected sources of funding. Consider creating a table or chart to display this information.