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Business & Finance

Capital Structures Financial Plan

Wk 6 Summative Assessment: Capital Structures Financial Plan

Business Description

The business case described herein relates to Johnson and Johnson Inc. Pharmaceutical Company and its plan to support research and development. The company requires more financing to support research and development. It 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.

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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 favorable 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.

Considering the two options identifies self-funding 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 considerable 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, 2023). This proves the company’s ability to consider self-funding as the best alternative.

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.

Year APR
2018 13.4%
2019 14.02%
2020 13.2%
2021 15%
Average 13.9125%

3 years Profit-and-Loss Statement

Johnson and Johnson, Inc. – Projected Income Statements
*All figures posted in thousands. 12/30/22 % 09/30/23 % 09/30/24 % 09/30/25
Total Revenue       94,943,000 4%       98,740,720 5%     103,677,756 6%     109,898,421
Cost of Revenue       31,089,000       32,332,560       33,949,188       35,986,139
Gross Profit       63,854,000 4%       66,408,160 5%       69,728,568 6%       73,912,282
Operating Expenses       40,151,000       41,757,040       43,844,892       46,475,586
Operating Income       23,703,000       24,651,120       25,883,676       27,436,697
Net Non-Operating Interest             214,000             222,560             233,688             247,709
Other Income Expenses       (2,192,000)       (2,279,680)       (2,393,664)       (2,537,284)
Pretax Income       21,725,000       22,594,000       23,723,700       25,147,122
Tax Provision          3,784,000          3,935,360          4,132,128          4,380,056
Net Income Common Stockholders       17,941,000 4%       18,658,640 5%       19,591,572 6%       20,767,066

Project Revenue Assumptions          

The profit and loss statement from the prior three years of research and development projects shows the results. According to the statement, the company’s revenue is expected to grow by 4% in its second year of operation, 5% in its third year, and 6% in its fourth. It should be noted that these revenue growth percentages are based on particular assumptions. First, research and development will provide innovative commodities to increase sales. Second, the market economy is anticipated to remain steady throughout the first four years of operation. This indicates that the market’s representative demographics will continue to have steady incomes and a relatively low inflation rate. The estimates in the presented profit and loss statement cover more than just revenues. They cover the net income for common shareholders and the gross profit margin. Notably, this implies that the shareholders’ gross profit margin and net income are consistent with the previous presumptions. Ultimately, the business’s performance will result in profitability pending research and development.

Direct Costs Estimation

The intended research and development will include direct costs, which are included in the cost of goods sold in the projected income statements. According to Franzen et al. (2019), direct costs refer to expenses that can be attributed directly to a product made or service offered. For the research and development project of Johnson & Johnson Inc., various direct costs must be incurred. The table below represents their estimates.

Direct cost Estimated amount in thousands
Chemical supplies $4,000
Power supply $204
Design technology $950
Electronics supply $3,125
Labor cost $1,050
Total $9,329

Conclusion

As indicated above, the financial plan for Johnson and Johnson Inc.’s intended research and development project is given. The financial plan relates to a research and development project to develop a new innovative product to offer to the market. Notably, this project will require significant investment, with the pharmaceutical industry having one of the highest direct costs. A total of $9,329,000 in direct costs is estimated for the project. However, Johnson and Johnson Inc. has a solid financial base, making it possible to pursue the intended project. The company will consider the self-funding approach to fund the project. The solid financial base of the company makes it possible to select this funding option. Essentially, self-funding is an affordable funding approach and will not result in an increased cost of capital for the company. Thus, the weighted cost of capital for Johnson and Johnson Inc. will remain steady at 6.1% beyond the project start. The income statement shows that more profits are estimated after three years of undertaking the project. The revenues for the company will grow steadily at a rate of 4%, 5%, and 6%, respectively, in the first three years of operation. The increase in revenues will justify the expenses incurred in the cost of goods sold as direct expenses. Overall, the financial plan demonstrates that a larger company such as Johnson & Johnson can benefit in planning costs, estimating revenues, and evaluating the feasibility of projects.

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References

Franzen, N., van Harten, W. H., Retèl, V. P., Loskill, P., van den Eijnden-van Raaij, J., & IJzerman, M. (2019). Impact of organ-on-a-chip technology on pharmaceutical R&D costs. Drug discovery today, 24(9), 1720-1724.

GuruFocus. (2023). Johnson &Johnson (NYSE: JNJ)-WACC. https://www.gurufocus.com/term/wacc/JNJ/

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.

Yahoo Finance. (2023). https://finance.yahoo.com/quote/JNJ/

See Also: NURS-FPX 4020 Assessment 1 Enhancing Quality and Safety

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Question 

As the business manager, you need to determine more significant funding sources by creating a financial plan to help reduce duplication of resources, identify requirements and risks, and determine various financing options. Completing this planning is an essential step for all businesses to take if they want to succeed. Larger companies may delegate this process to financial managers, financial analysts, or operations managers.

Wk 6 Summative Assessment: Capital Structures Financial Plan

Wk 6 Summative Assessment: Capital Structures Financial Plan

You create a financial plan for your company to help distinguish between sources, requirements, and risks associated with various types of long- and short-term financing capital structures that your company can use in the future.

Assessment Deliverable

Draft a 3- to 4-page financial plan for your company. This plan should include sections for a business case and profit-and-loss statements. Include the following items:

  • A business case that includes a description, type of business, and sources of funding
  • Use your Wk 5 Assessment Prep: Business Case Research assignment and feedback.
  • A profit-and-loss statement for 3 years
  • Project revenue. State realistic assumptions, such as growth per year, in your projections.
  • Estimate direct costs, including capital, marketing, labor, and supply.
  • A conclusion that includes an explanation of what working through a financial plan can do for a larger company

Cite references to support your assessment according to APA guidelines.

Submit your assessment.

Assessment Support
  • Rubric for guidance on deliverable expectations

Note Please:

Writing Standards – Please follow all APA formatting requirements, in-text referencing requirements, and referencing for all work – induing discussion questions, participation, presentations, etc. Support all assertions. The UOPX APA Sample Writing Paper is an excellent resource.

Originality – if you submit work with more than a 10% Turnitin match (adequately referenced), the work will be reviewed for originality. Work with originality issues will be scored a zero.