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 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 70% 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 $200,000 and $768,825 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 Year 1 (Forecasted) $15,000,000 10,500,000 600,000 $3,900,000 390,000 3,510,000 1,404,000 $2,106,000 200,000 1,906,000 631,800 $1,274,200 Net sales Less: Operating costs, except depreciation and amortization Less: Depreciation and amortization expenses 600,000 Operating income (or EBIT) Less: Interest expense Pre-tax income (or EBT) Less : Taxes (40%) Earnings after taxes Earnings available to common shareholders Contribution to retained earnings Less: Preferred stock dividends Less: Common stock dividends $1,593,925

Answer 1

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