Question

PRO FORMA INCOME STATEMENT Austin Grocers recently reported the following 2016 income statement (in millions of dollars): Sales Operating costs including depreciation $700 500 EBIT $200 40 Interest EBT $160 Taxes (40%) Net income $96 $32 Dividends Addition to retained earnings $64 For the coming year, the company is forecasting a 25% increase in sales, and it expects that its year-end operating costs, including depreciation, will equal 65% of sales. Austin's tax rate, interest expense, and dividend payout ratio are all expected to remain constant. a. What is Austin's projected 2017 net income? Enter your answer in millions. For example, an answer of $13,000,000 should be entered as 13. Round your answer to two decimal places. million b. What is the expected growth rate in Austin's dividends? Do not round your intermediate calculations. Round your answer to two decimal places.

Answer 1

The income statement (in Million Dollars)

	2016	2017 (coming Year)
Sales	$700	$875 [$700 * (1+25%)]
Less: Operating Costs including depreciation	$500	$625 [$500 * (1+25%)]
EBIT	$200	$250
Less: Interest expense	$40	$40
EBT	$160	$210
Less: Taxes (40% of EBT)	$64	$84
Net income	$96	$126
Dividends	$32	$42
Addition to retained earnings	$64	$84

Dividend payout ratio calculation:

In 2016, Net income was $96 million

The company paid out $32 million in cash dividends

Therefore payout ratio = Dividend paid/ Net Income

= $32 million/ $96 million = 0.3333 or 33.33%

In 2017, Net income was $126 million

If dividend payout ratio is constant at 33.33%

Then

Dividend paid= Net Income * dividend payout ratio

= $126 million * 33.33% = $42 million

1. In 2017, Net income = $126.00 million (refer above table)

2. Expected growth rate of dividends = (dividend paid in 2017 - dividend paid in 2016)/ dividend paid in 2016

= ($42 million - $32 million)/ $32 million

= 0.3125 or 31.25%