Question

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 25v/o 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 80% 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 $100,000 and $642,600 of preferred and common stock dividends, respectively.

Answer 1

Calculate the forecasted income statement as follows: A B Year 2 Forecasted S18,750,000 $15,000,000 $600,000 S3,150,000 $472,500 $2,677,500 S1,071,000 S1,606,500 S100,000 S1,506,500 $642,600 S863,900 Year 1 1 Particulars 2 Net sales 3 Less: Operating cost except depreciation and amortization 4 Less: Depreciation and amortization expenses 5 Operating income 6 Less: Interest expenses $15,000,000 $12,000,000 $600,000 $2,400,000 $240,000 $2,160,000 S864,000 $1,296,000 7 EBT 8 Less tax @ 40% 9 Earnings after tax 10 Less: Prefered stock dividends 11 Earnings available to common shareholders 12 Less: Common stock dividends 13 Contribution to retained earnings $100,000 $1,196,000 $518,400 S677,600 Formulas: A Year 1 15000000 1 Particulars 2 Net sales 3 Less: Operating cost except depreciation and amortization 12000000 4 Less: Depreciation and amortization expenses 5 Operating income 6 Less: Interest expenses 7 EBT 8 Less tax 40% 9 Earnings after tax 10 Less: Prefered stock dividends 11 Earnings available to common shareholders 12 Less: Common stock dividends 13 Contribution to retained earnings Year 2 Forecasted =B2*(1+25 % ) -C2*80% |=B4 600000 |-B2-B3-B4 |-C2-C3-C4 240000 =B5-B6 |-B7*40% |=B7-B8 100000 |=B9-B10 -518400 |=B11-B12 |-C5*15 % -C5-C6 =C7*40% -C7-CS |100000 - C9-C10 642600 -C11-C12 CO