Question

Fuzzy Button Clothing Company's income statement reports data for its first year of operation. The firm's CEO would like sales to increase by 25% next year 1. Fuzzy Button is able to achieve this level of increased sales, but its interest costs increase from 10% to 15% of earnings before interest and taxes (EBIT) 2. The company's operating costs (excluding depreciation and amortization) remain at 75% of net sales, and its depreciation and amortization expenses remain constant from year to year 3. The company's tax rate remains constant at 40% of its pre-tax income or earnings before taxes (EBT) 4. In Year 2, Fuzzy Button expects to pay $100,000 and $555,900 of preferred and common stock dividends, respectively Complete the Year 2 income statement data for Fuzzy Button, then answer the questions that follow. Be sure to round each dollar value to the nearest whole dollar Fuzzy Button Clothing Company Income Statement for Year Ending December 31 Year Year 1 (Forecasted) $10,000,000 7,500,000 400,000 $2,100,000 210,000 1,890,000 756,000 $1,134,000 100,000 1,034,000 453,600 $580,400 Net sales Less: Operating costs, except depreciation and amortization Less: Depreciation and amortization expenses 400,000 Operating income (or EBIT) Less: Interest expense Pre-tax income (or EBT) Less: Taxes (40%) Earnings after taxes Earnings available to common shareholders Contribution to retained earnings Less: Preferred stock dividends Less: Common stock dividends $733,850 Given the results of the previous income statement calculations, complete the following statements In Year 2, if Fuzzy Button has 5,000 shares of preferred stock issued and outstanding, then each preferred share should expect to receive in annual dividends If Fuzzy Button has 400,000 shares 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 Fuzzy Button's before interest, taxes, depreciation and amortization (EBITDA) value changed from in Year 1 to in Year2 is contribution to retained earnings, $580,400 and $733,850, respectively. This is because statement involve payments and receipts of cash to say that Fuzzy Button's net inflows and outflows of cash at the end of Years 1 and 2 are equal to the company's annual of the item reported in the income

Answer 1

Fuzzy
Income Statement for year ending Dec 31
	Year 1	Year 2 (Forcasted)
Net Sales	10000000	12500000	25% growth
Less: Operating costs	7500000	9375000	75% of sales
Less: Dep and amorti expenses	400000	400000	constant
OI or EBIT	2100000	2725000
Less: Interest exp	210000	408750	15% of EBIT
EBT	1890000	2316250
Less: tax	756000	926500	40%
EAT	1134000	1389750
Less: Pref. Stock dividend	100000	100000
Earnings available for CS	1034000	1289750
Less: CS dividends	453600	555900
Contribution to RE	580400	733850
EACH PREFERRED SHARE IS EXPECTED TO RECEIVE 100000/5000 = $20
CHANGE IN COMMON STOCK DIVIDEND FROM YR. 1 $1.13/ SHARE TO YR.2 $1.39/SHARE.
CHANGE IN EBITDA FROM YR.1 $2500000 TO YR.2 $3125000.
IT IS NOT TO SAY THAT---- $733850, RESPECTIVELY. THIS IS BECAUSE NOT ALL OF THE ITEM----OF CASH.
(this is because if we add the depreciation and amortisation expenses to Contribution to RE, then
it will equals to the net cash flow of the year)