Question

Chapter 2: Aplia Homework Attempts: Keep the Highest: /2 3. Income statement The income statement, also known as the profit and loss (P&L) statement, provides a snapshot of the financial performance of a company during a specified period of time. It reports a firm's gross income, expenses, net income, and the income that is available for distribution to its preferred and common shareholders. The income statement is prepared using the generally accepted accounting principles (GAAP) that match the firm's revenues and expenses to the 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: Blue Hamster Manufacturing 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. Blue Hamster 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 65% 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, Blue Hamster expects to pay $200,000 and $1,824,525 of preferred and common stock dividends, respectively. Complete the Year 2 income statement data for Blue Hamster, then answer the questions that follow. Be sure to round each dollar value to the nearest whole dollar.

Answer 1

1. In year 2, if blue hamster has 5000 shares of preffered stock issued and outstanding, then each preffered share should expect to receive $40 in annual dividends.

Total expected dividend payout - $200000

Number of preffered stock outstanding - 5000

Hence each preffered share expects to receive $40 ($200000/5000)

2. EBIT in year 2 would be $11925000 after deducting costs from net sales. Interest cost would be 15% of EBIT as per additional info given in the question, hence interest would be $1788750.

Hence EBT would be $11925000 - $1788750 = $10136250

Tax rate is 40 %, hence EAT would be $6081750 ($10136250x 60%)

Hence earnings available to Common Shareholders would be $5881750 after deducting preffered stock dividend.

Outstanding common stock = 40000 shares

EPS for Year 1 = $4822000/40000 = $120.55 per share

EPS for Year 2 = $5881750/40000 = $147.04 per share

Hence EPS has changed from $120.55 per share in year 1 to $147.04 per share in year 2

3. EBITDA for year 1 is Net sales less operating costs except depreciation, amortization

Hence EBITDA for Year 1 = $30000000 - $19500000 = $10500000

Hence EBITDA for Year 2 = $37500000 - $24375000 = $13125000

Hence EBITDA has changed from $10500000 in year 1 to $13125000 in year 2

Note - First 4 sub parts of the question are being solved in the absence of specific instructions to solve particular sub part.