Question

Ch 03: Assignment - Financial Statements, Cash Flow, and Taxes common shareholders. The income statement is prepared using the generally accepted accounting principles (GAAP) that match the firm's revenues and expenses to the period in which they were incurred, not necessarily when cash was received or paid. Investors and analysts use the information given in the income statement and other financial statements and reports to evaluate the company's financial performance and condition Consider the following scenario: 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 by 25% next year. 1. Cold Goose 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 70% of net sales, and its depreciation and amortization expenses remain constant from year to year. 3. The company's tax rate remains constant at 25% of its pre-tax income or earnings before taxes (EBT). 4. In Year 2, Cold Goose expects to pay $200,000 and $1,922,063 of preferred and common stock dividends, respectively. Complete the Year 2 income statement data for Cold Goose, then answer the questions that follow. Be sure to round each dollar value to the nearest whole dollar.

Answer 1

New income statement

Net Sales (30,000,000 × 1.25) 37,500,000

Less: Operating cost ( 70% of sales) (26,250,000)

Less: Depreciation and amortization (1,200,000)

Operating Income (EBIT)    10,050,000

Less: interest expense (15% of EBIT) (1,507,000)

Pre tax income (EBT) 8,542,500

Less: Taxes (25%) (2,135,625)

Earnings after taxes. 6,406,875

Less: preferred stock dividend. (200,000)

Earnings available to common 6,206,875

shareholders

Less: common stock dividend. (1,922,063)

Contribution to retained earnings 4,284,812

•Dividend per preferred share = 200,000 / 5,000 = $ 40

• Eps in year 1 = 12.66. , year 2 = 10.71

• EBITDA in year 1 = 9,000,000. Year 2 = 11,250,000

• Right , list