Sources of capital
The sources of funds for the company are divided into two categories means that the company is going to collect funds from two sources. These two sources of funds include debt and equity. The company is going to receive total long term debt of $13,000 from the financial institutions. Apart from debt, the company is going to receive capital from the equity holders as the company is going to issue 100 preferred stocks and 100 common stocks at the beginning of the business. This long term debt and capital from equity will be the major sources of the capital to the company. For now, the equity is held by the owners or the founders of the company that are also going to play the major roles within the organization as part of the staff. These equity holders include CEO (Nicholas Hasbrouck), CTO (John Francella) and COO (Sumiko Williams), CSO (Damien Danavall) and CFO (Shiraz Penjweeni). In total, five persons for now holding the stocks of the company, however, as per the value and demand of the stock of the company will increase in future; they will sell their stocks to other investors to increase the equity of the company in the market.
For now, the major stakeholders of the company include CEO (Nicholas Hasbrouck), CTO (John Francella) and COO (Sumiko Williams) as they hold more than 10% of the equity of the company. All of them hold 11% equity that means the major stakeholders hold 33% of the total equity of the company. The remaining stock will be public.
Expenses & Additional Expenses
Premises
The major expenses of the company include the expense of premises, staff salaries, equipment and machines and other purchases mainly. The company is going to begin with renting the premises. The company is going to pay $28,500 as the office rent per month. Other than the rent of the office, the company has to pay monthly utilities of $2,900 per month.
Salaries
The company with a total staff of 25 individuals is going to pay $72,500 per month as the salary expenses of 25 employees. The staff includes Senior Application Engineer, Inventory, Technical Support Mgr., Technical Support, Tech. Support Assistant, CTO, System Administration, Project Manager, Programming, Quality Assurance, VP Marketing, Mktg. Manager, VP Sales, Sales Representative, Sales Engineer, VP Business Development, Customer Support, and Marketing Assistant, CEO, CFO, COO, HR Manager, Office Manager and Administration Assistant.
Marketing and Promotion
Marketing is one of the major aspects of the business that is very important to promote the products and services among the target audience and customers. In this context, the company will allocate different expense budget for different marketing and promotion activities. These activities will mainly include advertising, promotional material, and trade shows. The monthly expense of advertising will be $500, of the promotional material will be $300 and for trade shows will be $1,000.
Other than these major expenses, the company is going to pay for some other expenses that include consultancy, insurance, traveling, telephone, taxes and professional services.
The table below shows the total expenses discussed above with the yearly expenses:
Purchases
Apart from these expenses, the company is going to purchase hardware, software, and equipment and machines for its four different departments include manufacturing, engineering, sales and marketing and operations. The list of the major equipment is as follows:
SIEVE SHAKER
Multi Purpose R&D Equipment
CPMDCB
CPM PLZ GMP Lab Model
Computers
Telephones
Office furniture
Other equipment and machines
Five Year Forecast
The table below shows the five year trend of income statement for the Volentix Pharmaceuticals:
It can be seen in the income statement above that the net income of the company is rapidly growing from 2015 to 2019; however, the growth rate is expected to remain similar from 2017 to 2019. It is expected based on some assumptions such as the competition will increase in future, the prices will be competitive and lower down; the cost can be increased, etc. Due to all these reasons, the net income growth rate is expected to remain slow and constant from the third year of the business. The company can introduce new products to control the growth rate of the revenue. Apart from the revenue, it can also be seen that the company is expected to make a profit from the first year of the business, and the profit will rise every year.
The graph below shows the growth trend of revenue, income, and gross margin:
The table below shows the cash flows of the company:
The table shows the sources from where the company will generate cash for its operations. These sources include net income, depreciation, equity in addition to the account payables, salaries payable, taxes payable and additions to long term debt.
Breakeven Analysis
The graph below shows the breakeven analysis of the financials of Volentix Pharmaceuticals:
The graph shows that the breakeven point of the Volentix Pharmaceuticals occurs somewhere between January 2015 and April 2015, where, the cash flows of the company are neither negative nor positive as the company started covering its expenses with its total receipts (Singh & Deshpande, 1982). However, it can also be seen in the graph that the cash begins to rise from April 2015, but there are few points where, the expenses are exceeding from the cash such as in July 2015, October 2015, January 2016, April 2016, July 2016 and Oct 2016. These are the points where the expenses go high from the cash. These are months in which the company will pay taxes. It means whenever the company will pay the taxes; its cash flows will become negative.
Cost-Benefit Analysis
As the company is going to provide stocks in the market, it is important to analyze that how much the company will benefit to the investors (Layard & Glaister, 1994). Volentix Pharmaceuticals will provide viable returns to its investors on their investments. With the outstanding performance in terms of revenue, net income, and profitability, the company is going to provide earnings to the investors from the first month of its operations i.e. January 2015.
The investors are expected to make 40% of the net income from the return on their investments in the preferred stocks while the remaining net income will be distributed as the return on the investment in common stock. The company will only issue stocks at the start up of the business and therefore, the investors are expected to make a profit from the first month of the first year of the business.
Budgets
The five year budget of the Volentix Pharmaceuticals can be found in the table below:
The table shows that cash from the total sources to the company as well as cash the company will use. It can be seen in the table that the ending cash of the company is increasing over the period of five years from 2015 to 2019. It is the estimate of the budget of five years of the business of Volentix Pharmaceuticals.
Assumptions
The company forecasted its five years trends of financials based on the few major assumptions. First of all, the depreciation of the purchases of the company is assumed as follows:
It is assumed that the depreciation of the hardware going to use in all four departments would be five years, three years of depreciation for software going to use in all four departments and eight years of depreciation for the furniture and fixes.
For the start up business, the company is going to begin with only one product i.e. antibiotics for Gram-positive bacterial infections treatment. It is assumed that the return on the revenue of the product would be 10%. The sales and cost of the company are assumed as follows:
The company assumes that the cost of the product will remain same. However, the prices will increase as per the demand of the antibiotics will rise in the market. It is also assumed that the total unit sales would also be increases from 980,000 to 2,800,900 from 2015 to 2019.
Financing
The table below shows the balance sheet of the company as the timeline of the financing:
The table shows that the financing of the company will be based on the debt as well as the equity of the company. Although in the beginning, the company will depend on the debt, however, its equity will rise in future. The graph below shows the five years trend of debt to equity ratio:
The debt to equity ratio analysis will have been declined from 2015 to 2019 with the lowest in 2019. The lowest debt to equity is essential for the business to ensure to the investors that the business is stable, and they have more control over it. The low debt to equity will attract more investors in future to invest in the company (Bhandari, 1988). However, for the future plan of the financing, the company will receive debt to maintain its debt to equity so that the owners will not lose the complete control of the company by making all financing depending on the investors.
Investors
The company is aimed to target the investors both as debt providers and equity holders. The company is looking to target financial institutions as the debt providers as the institutions such as Banks and insurance companies have more interest to invest in the business. The company will issue the stocks in the market.
Exit strategy
According to above plan, business is going to have strong liquidity as the cash flows are positive from the beginning of its operations. The investors can easily achieve high liquidity as the profitability of the company is expected to very high. The removal of the investment will not make the investors face losses, as the high income and profitability of the company will attract more investors to take hold in the company by purchasing its stocks from the existing investors. However, in case there arrives any unforeseen issue related to liquidity, the business has the option to generate cash by acquiring more capital from the market in the form of debt as already planned above.
However, apart from all these expectations and liquidity of the investors, the business has still potentials to make losses. For this purpose, the company has a simple secondary plan to sell out the business on the whole. The business has strong viability for the pharmaceutical industry and companies due to the high quality production of antibiotics to treat a serious disease (Da Cunho, 2007); therefore it can sell rights to others pharmaceutical firms to manufacture the medicine, while paying a royalty to this business. This will be an additional source of liquidity. Lastly, a business can sell its license on the whole to exist.
References
Bhandari, L. C. (1988). Debt/equity ratio and expected common stock returns: Empirical evidence. The Journal of Finance, 43(2), 507-528.
Da Cunha, U. P. (2007). Study on the viability of high quality drugs manufacturing in Bangladesh. Eschborn, Germany: GTZ.
Layard, R., & Glaister, S. (1994). Cost-benefit analysis. Cambridge University Press.
Singh, S. P., & Deshpande, J. V. (1982). Break-Even Point. Economic and Political Weekly, M123-M128.
