Question

The income statement, also known as the profit and loss statement, helps calculate the firm's net income that is available to shareholders. The incorne statement is usually prepared using the International Financial Reporting Standards (IFRS), which match revenues and expenses to the period in which they were incurred, not necessarily when cash was received or paid The following is the income statement of Water and Power Co. in its first year of operation: Water and Power Co. Income Statement For the Year Ending on December 31 (Millions of dollars) Year 1 $3,500 2,800 140 2,940 560 56 504 202 302 Net sales Operating costs, except depreciation and amortization Depreciation and amortization Total operating costs Operating income (or EBIT) Less: Interest Earnings before taxes (EBT) Less: Taxes (40%) Net incone available to shareholders The firm's CEO would like sales to increase by 25% next year. Assume that (1) the operating costs (excluding depreciation and amortization) remain at 80% of sales, (2) depreciation and amortization remain at 4% of sales, and (3) the interest cost increases from 10% to 15% of earnings before interest and taxes (EBIT). The tax rate of 40% also remains the same. What will be the company's earnings before interest and taxes in the second year? $457 million $700 million $457 million Different companies have different debt-related expenses, depreciation, amortizati in any of these expenses will have an impact on the company's income statement offerent companies have different debt-related expenses, depreciation, amortizatiss milion Changes Session

Answer 1

Earnings before interest and Taxes in second year:
Net sales (3500+25%)				4375
Operating cost (4375*80%)			3500
Depreciation & Amortization			175
	(4% of 4375)
Total Operating cost				3675
Earnings before interest and Taxes in second year:				700
Answwer is $ 700 millions