Question

Ch 03: Assignment- Financial Statements, Cash Flow, and Taxes 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 vear 1. Blue Hamster is able to achieve this level of increased sales, but its interest costs increase from 10 % to 15% of eamings 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 $150,000 and $401,625 of preferred and common stock dividends, respectively Complete the Year 2 income statement data for Blue Hamster, then answer the questions that follow. Be sure to round each dollar value to the nearest whole dollar. Blue Hamster Manufacturing Inc. Income Statement for Year Ending December 31 Year 2 tforecasted) H B udget frlendly, Secpraductvevi deinos, olfrsndleste orhde NT h 03: Assignment- Financial Statements, Cash Flow, and Taxes Complete the Year 2 income statement data for Blue Hamster, then answer the questions that folow, Be sure to round each dollar value to the nearest whole dollar. Blue Hamster Manufacturing Inc. Income Statement for Year Ending December 31 Year 2 (Forecasted) Year 1 $15,000,000 Net sales 12,000,000 Less: Operating costs, except depreciation and amortization 600,000 600,000 Less: Depreciation and amortization expenses $2,400,000 Operating income (or EBIT) Onel 240,000 Less: Interest expense 2,160,000 Pre-tax income (or EBT) 864,000 Taxes (40% ) Less: $1,296,000 Earmings after taxes 150,000 Less: Preferred stock dividends 1,146,000 Eanings available to common shareholders 324.000 Less: Common stock dividends $1.054.875 Contrbution to retained eamings $822,000 G H See predact evlews denes offu andteators etfrlendly htaoatn Q Search this course CENGAGE MINDTAP 03: Assignment- Financial Statements, Cash Flow, and Taxes In Year 2, if Blue Hamster has 10,000 shares of preferred stock issued and outstanding, then each preferred share should expect to receive in annual dividends. If Blue Hamster has 200,000 shares of common stock issued and outstanding, then the firm's earnings per share (EPS) is expected to changes in Year 2 in Year 1 to from in Year 1 to Blue Hamster's before interest, taxes, depreciation and amortization (EBITDA) value changed from in Year 2 to say that Blue Hamster's net inflows and outflows of cash at the end of Years 1 and 2 are equal to the company's annual of the item reported in the income It is contribution to retained earnings, $822,000 and $1,054,875, respectively. This is because statement involve payments and receipts of cash. Grade i Now Save &Coninue H

Answer 1

Answer: Blue Hamster Manufacturing 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 Less: Depreciation and Amortization |Operating Income (or EBIT) Less: Interest Expense |Pre-Tax Income (or EBT) Less: Taxes (40%) Earnings after Taxes Less: Preferred Stock Dividends Earnings available to Common Shareholders Less: Common Stock Dividends Contribution to Retained Earnings 12,000,000 15,000,000 600,000 600,000 2,400,000 3,150,000 240,000 472,500 2,160,000 2,677,500 864,000 1,071,000 1,296,000 1,606,500 150,000 150,000 1,456,500 1,146,000 324,000 401,625 822,000 1,054,875 Calculation: Forecasted Net Sales $15,000,000 1.25 $18,750,000 Forecasted Operating Cost, except Depreciation and Amortization $18,750,000* 80% = $15,000,000 Forecasted Interest Expenses $3,150,000 * 15% = $472,500 -

• In Year 2, if Blue Hamster has 10,000 Shares of Preferred Stock issued and outstanding, then each preferred Share should expect to receive $15 ($150,000 / 10,000) in annual dividends.

• If Blue Hamster has 200,000 shares of Common Stock issued and outstanding, then the firm’s earnings per share is expected to change from $5.73 ($1,146,000 / 200,000) in Year 1 to $7.28 ($1,456,500 / 200,000) in Year 2.

• Blue Hamster’s before Interest, Taxes, Depreciation and Amortization (EBITDA) value changed from $3,000,000 in Year 1 to $3,750,000 in Year 2.

• It is hard to say that Blue Hamster’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, $822,000 and $1,054,875 respectively. This is because few of the items reported in the Income statement involves payments and receipts of Cash.