Question

?Please answer with details and equations.

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 25% 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 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 40% of its pre-tax income or earnings before taxes (EBT). 4. In Year 2, Blue Hamster expects to pay $100,000 and $821,100 of preferred and common stock dividends, respectively

Answer 1

Particulars	Year 1	Year 2
Net sales	$10,000,000	12,500,000
Less operating cost except depri and amort	6,000,000	7,500,000
	4,000,000	5,000,000
Less depriciation and amortization	(400,000)	(400,000)
Operating income	3,600,000	4,600,000
Less interest exp	(360,000)	(690,000)
Pre tax income	3,240,000	3,910,000
Less tax at40%	(1,296,000)	(1,564,000)
Earnings after tax	1,944,000	2,346,000
Less preferred stock dividend	(100,000)	(100,000)
Earning available to common share holders	1,844,000	2,246,000
less common stock dividend	(680,400)	(821,100)
Contribution to retained earnings	1,163,600	1,424,900

1. Each preferred stock should expect to recieve $10 (100,000 / 10000)

2. Eps year 1 : 680,400 / 500,000 = $1.36

    EPS year 2 : 821,100/ 500,000 = $1.64

Eps changes from $1.36 in Year1 to $1.64 in Year 2.

3. $ 4,000,000 in Year 1 to $5,000,000 in Year 2

4. (a) Not right (b) transactions