Financial Plan Assignment-Johnson&Johnson Company

Business Description, Type of Business, and Sources of Funding

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. Johnson and Johnson Inc. 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.

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.

Considering the two options identified, self-funding is the best option for Johnson and Johnson Inc. to fund its 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 its 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). Essentially, this proves Johnson and Johnson Inc.’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%

A 3-Year Period 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

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 are anticipated to provide innovative commodities that will increase sales. Second, the market economy is anticipated to continue to be steady throughout the first four years of operation. In essence, 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 still consistent with the presumptions made before. Ultimately, the business’s performance will result in profitability pending research and development.

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 that will seek 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. Johnson and Johnson Inc. 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. As a result, the weighted cost of capital for Johnson and Johnson Inc. will remain steady at 6.1% beyond the project start. As shown in the income statement, more profits are estimated after three years of undertaking the project. The revenues for Johnson and Johnson Inc. 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 intended research and development project is worthwhile for the company to pursue and enhance profitability.

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). Johnson & Johnson (JNJ) Stock Price, News, Quote & History. https://finance.yahoo.com/quote/JNJ/

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Question

The company I am using is *****Johnson&Johnson****

You, as the business manager, need to be able to determine larger sources of funding 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 important 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.

Financial Plan Assignment-Johnson&Johnson Company

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

Financial Plan Assignment-Johnson&Johnson Company