Question

SCEU WUURILL JUL Green Caterpillar Garden Supplies Inc.'s income statement reports data for its first year of operation. The 25% next year 1. Green Caterpillar 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 60% 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, Green Caterpillar expects to pay $100,000 and $1,759,500 of preferred and common stock dividends, respectively Complete the Year 2 income statement data for Green Caterpillar, then answer the questions that follow. Be sure to round each dollar value to the nearest whole dollar You bols Green Caterpillar Garden Supplies Inc. Income Statement for Year Ending December 31

Answer 1

Answer: Green Caterpillar Garden Supplies Inc. Income Statement for Year Ending December 31 Year 2 Year 1 (Forecasted) Net Sales $ 15,000,000 $ 18,750,000 Less: Operating Costs, Except Depreciation and Amortization $ 9,000,000 $ 11,250,000 Less: Depreciation and Amortization $ 600,000 $ 600,000 Operating Income (or EBIT) $ 5,400,000 $ 6,900,000 Less: Interest Expense $ 540,000 $ 1,035,000 Pre-Tax Income (or EBT) $ 4,860,000 $ 5,865,000 Less: Taxes (25%) $ 1,215,000 $ 1,466,250 Earnings after Taxes $ 3,645,000 $ 4,398,750 Less: Preferred Stock Dividends $ 100,000 $ 100,000 Earnings available to Common Shareholders $ 3,545,000 $ 4,298,750 Less: Common Stock Dividends $ 1,458,000 $ 1,759,500 Contribution to Retained Earnings $ 2,087,000 $ 2,539,250 • In Year 2, if Green Caterpillar 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 Green Caterpillar has 400,000 shares of Common Stock issued and outstanding, then the firm's earnings per share is expected to change from $8.86 ($3,545,000 / 400,000) in Year 1 to $10.75 ($4,298,750 / 400,000) in Year 2. . Green Caterpillar's before Interest, Taxes, Depreciation and Amortization (EBITDA) value changed from $6,000,000 in Year 1 to $7,500,000 in Year 2. • It is incorrect to say that Green Caterpillar'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, $2,087,000 and $2,539,250 respectively. This is because all but one of the items reported in the Income statement involves payments and receipts of Cash.