Question

Cold Goose Metal Works Inc.'s income statement reports data for its first year of operation. The firm's CEO would like sales to increase 25% next year.

1. Cold Goose is able to achieve this level of increased sales, but its interest cost increase from 10% to 15% of earnings before interest and tax (EBIT)

2. The company's operating cost (excluding depreciation and amortization) remains at 70% of net sales, and its depreciation and amortization expenses reamin constant from year to year.

3. The company's tax rate remains constant at 40% of its pre-tax income or EBT

4. In year 2, Cold Goose expects to pay $150,000 and 854,250 of preferred and common stock dividends, respectively

Complete the income statement data for Cold Goose, then answer the questions that follow. Be sure to round dollar value to the nearest whole dollar.

                                                                                                                                    Year 1                      Year 2

Net sales                                                                                                                     20,000,000

Less: Operating costs, except depreciation and amortization                                  14000,000

Less: Depreciation and amortization expenses                                                        800,000                     800,000

Operating income (or EBIT)                                                                                        5,200,000

Less: Interest expense                                                                                                520,000

Pre tax income (or EBT)                                                                                              4,680,000

Less: Taxes (40%)                                                                                                      1,872,000

Earnings after taxes                                                                                                   2,808,000

Less: Preferred stock dividends                                                                                150,000

Earnings available to common shareholders                                                            2,658,000

Less: common stock dividends                                                                                 702,000

Contribution to retain earnings                                                                                  1,956,000                       2,412,750

1. In year 2, if Cold Goose has 10,000 Shared of preferred stock issued and outstanding, then each preferred share should expect to receive ________ in annual dividends.

2. If Cold Goose has 200,000 shared of common stock issued and outstanding, then the firm’s earnings per share (EPS) is expected to change from_______ in year 1 to ____ in year 2

.

3. Cold Goose’s earnings before interest, taxes, depreciation and amortization (EBITDA) value changed from______ in year 1 to_____ in year 2

  

It is_____ to say that Cold Goose’s net inflows and outflows of cash at the end of year1 and 2 are equal to the company’s annual contribution to retained earnings, $1,956,000 and $ 2,412,750, respectively. This is because____________ of the item reported in the income statement involve payments and receipts of cash.                      

Answer 1

Following will be the income statement for year 2

	Year 2
Sales (20000000x125%)	25000000
Less : operating cost (70% of 25000000)	(17500000)
Depriciation and amortization	(800000)
EBIT	$6700000
Less : interest (15% of 6700000)	(1005000)
Pre-tax income	$5695000
Less : tax expense (40%)	(2278000)
Earning after taxes	$3417000
Less : preferred stock dividend	(150000)
Earning available to common shareholders	$3267000
Less : common stock dividend	(854250)
Contribution to retained earnings	$2412750

1 . Each preferred share should expect to receive $150000/10000 = $15 as annual dividend.

2 . EPS is expected to change from $2658000/200000 = $13.29 in year 1 to $3267000/200000 = $16.335 in year 2.

3 . EBITDA value changed from 5200000+800000 = $6000000 in year 1 to 6700000+800000 = $7500000 in year 2.

4 . wrong , not all.