Question

Fuzzy Button Clothing Company'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, Fuzzy Button 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, Fuzzy Button expects to pay $150,000 and $1,466,250 of preferred and common stock dividends, respectively Complete the Year 2 income statement data for Fuzzy Button, then answer the questions that follow. Be sure to round each dollar value to the nearest whole dollar Fuzzy Button Clothing Company Income Statement for Year Ending December 31 Year 2 Year 1 (Forecasted) $25,000,000 15,000,000 1,000,000 $9,000,000 900,000 8,100,000 Net sales Less: Operating costs, except depreciation and amortization Less: Depreciation and amortization expenses 1,000,000 Operating income (or EBIT) Less: Interest expense Pre-tax income (or EBT)

Answer 1

Income Statement
Net Sales	31250000
Less:Operating costs	18750000
Depreciation	1000000
EBIT	11500000
Less: Interest	1725000
EBT	9775000
Less: Taxes	3910000
Earnings after tax	5865000
Less: Preferred stock dividend	150000
Earnings available to common stockholders	5715000
Less: Common stock dividends	1466250
Contribution to retained earnings	4248750

1:

Dividend per share = Total preference dividend/ Number of shares

= 150,000/10000

=$15

2: EPS in year 1 = Common stock dividend/ 200000 shares

= 1215000/200000

=$6.075

EPS in year 2 = 1466250/200,000 = $7.33

3: EBITDA in year 1 = EBIT+ depreciation

= 9000,000+ 1000,000

=$10,000,000

Year 2: EBITDA =11500000+ 1000000

= 12500,000

4: wrong; not all

Addition to retained earnings are not equal to cash flows because there are some non cash items such as depreciation also.