Question

Cute Camel Woodcraft 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. Cute Camel 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, Cute Camel expects to pay $100,000 and $1,281,375 of preferred and common stock dividends, respectively. Complete the Year 2 income statement data for Cute Camel, then answer the questions that follow. Be sure to round each dollar value to the nearest whole dollar. Cute Camel Woodcraft Company Income Statement for Year Ending December 31 Year 2 (Forecasted) Year 1 Net sales $15,000,000 Less: Operating costs, except depreciation and amortization 10,500,000 Less: Depreciation and amortization expenses 600,000 600,000 Operating income (or EBIT) $3,900,000 Less: Interest expense 390,000 Pre-tax income (or EBT) 3,510,000 Less: Taxes (25%) 877,500 Earnings after taxes $2,632,500 Less: Preferred stock dividends 100,000 Earnings available to common shareholders 2,532,500 1,053,000 Less: Common stock dividends Contribution to retained earnings $1,479,500 $1,822,062
options for question 1 are: $20, $40, $30, $50

options for question 2 are: (first blank) $6.58, $8.78, $9.75, $6.33.....(second blank) $10.68, $8.01, $7.76, $12.56

options for question 3 are: (first blank) $14,400,000, $4,777,500, $4,500,00, $6,532,500....(second blank) $8,228,437, $16,328.437, $5,625,000, $19,503,750

options for question 4 are: (first blank) correct, or incorrect.....(second blank) all but on, or all

Answer 1

Answer: Cute Camel Woodcraft Company Income Statement for Year Ending December 31 Year 2 Year 1 (Forecasted) Net Sales Less: Operating Costs, Except Depreciation and Amortization $ 15,000,000 $ 18,750,000 $ 10,500,000 $ 13,125,000 600,000 $ 3,900,000 $ 5,025,000 2$ Less: Depreciation and Amortization 600,000 Operating Income (or EBIT) 390,000 $ 3,510,000 $ 877,500 $ 2,632,500 $ 100,000 $ 2,532,500 $ 1,053,000 $ 1,479,500 $ 1,822,062 Less: Interest Expense Pre-Tax Income (or EBT) 753,750 4,271,250 Less: Taxes (25%) Earnings after Taxes Less: Preferred Stock Dividends Earnings available to Common Shareholders Less: Common Stock Dividends Contribution to Retained Earnings 1,067,813 3,203,437 100,000 3,103,437 1,281,375 • In Year 2, if Cute Camel has 5,000 Shares of Preferred Stock issued and outstanding, then each preferred Share should expect to receive $20 ($100,000 / 5,000) in annual dividends. • If Cute Camel has 400,000 shares of Common Stock issued and outstanding, then the firm's earnings per share is expected to change from $6.33 ($2,532,500 / 400,000) in Year 1 to $7.76 ($3,103,437/ 400,000) in Year 2. • Cute Camel's before Interest, Taxes, Depreciation and Amortization (EBITDA) value changed from $4,500,000 in Year 1 to $5,625,000 in Year 2. • It is incorrect to say that Cute Camel's Net inflows and outflows of cash at the end of Years 1 and 2 are equal to the Company's annual contribution to Retained Earnings, $1,479,500 and $1,822,062 respectively. This is because all but one of the items reported in the Income statement involves payments and receipts of Cash.