Question

18. Income statement The income statement, also known as a profit and loss (P&L) statement, provides a snapshot of a company's financial performance 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 period in which they are incurred, not necessarily when cash is received or paid. Investors and analysts use the information presented in the income statement, and the other financial statements and reports, to evaluate the company's financial performance and condition. Consider the following scenario: Green Caterpillar Garden Supplies 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. 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 70.00% 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, Green Caterpillar expects to pay $100,000 and $896,963 of preferred and common stock dividends, respectively. Complete the Year 2 income statement data for Green Caterpillar, then answer the questions that follow. Round each dollar value to the nearest whole dollar. Green Caterpillar Garden Supplies Inc. Income Statement for Year Ending December 31 Year 1 Year 2 (Forecasted)
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Answer 1

	Year 1		Year 2
Net sales	150,00,000	=15000000*1.25	187,50,000
Less : Operating costs, except D&A	105,00,000	=18750000*70%	131,25,000
Less : D&A expenses	6,00,000		6,00,000
Operating income (or EBIT)	39,00,000		50,25,000
Less : Interest expenses	3,90,000	=5025000*15%	7,53,750
Pre-tax income (or EBT)	35,10,000		42,71,250
Less : Taxes (40%)	14,04,000	=4271250*40%	17,08,500
Earnings after taxes	21,06,000		25,62,750
Less : Preferred stock dividend	1,00,000		1,00,000
Earnings available to common shareholders	20,06,000		24,62,750
Less : Common stock dividend	7,37,100		8,96,963
Contribution to retained earnings	12,68,900		15,65,787
In year 2, If Green Caterpillar has 10,000 shares of preferred stock issued and outstanding, then each preferred share should except to receive annual $10 (100,000/10,000) in annual dividends.
EPS	Year 1	Year 2
Shares outstanding 50,000	2006000/50000= 40.12	2462750/50000 = 49.26
EBITDA	Year 1	Year 2
EBIT + D&A	3900000+600000 = 4,500,000	5025000+600000 = 5,625,000