Cute Camel Woodcraft 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. Cute Camel 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 25% of its pre-tax income or earnings before taxes (EBT).
4. In Year 2, Cute Camel expects to pay $100,000 and $1,759,500 of preferred and common stock dividends, respectively.
Complete the Year 2 income statement data for Cute Camel.
Cute Camel Woodcraft Company
Income Statement for Year Ending December 31
Year 1 Year 2 (forecasted)
Net sales $15,000,000
Less: Operating costs, except
depreciation and amortization 9,000,000
Less: Depreciation and
amortization expenses 600,000 600,000
Operating income (or EBIT) $5,400,000
Less: Interest expense 540,000
Pre-tax income (or EBT) 4,860,000
Less: Taxes (25%) 1,215,000
Earnings after taxes $3,645,000
Less: Preferred stock dividends 100,000
Earnings available to
common shareholders 3,545,000
Less: Common stock dividends 1,458,000
Contribution to retained
earnings $2,087,000 $2,539,250
Given the results of the previous income statement calculations, complete the following statements:
• In Year 2, if Cold Goose has 5,000 shares of preferred stock issued and outstanding, then each preferred share should expect to receive__in annual dividends.
• If Cold Goose has 400,000 shares of common stock issued and outstanding, then the firm’s earnings per share (EPS) is expected to change from_in Year 1 to_in Year 2.
• Cold Goose’s earnings before interest, taxes, depreciation and amortization (EBITDA) value changed from_in Year 1 to_in Year 2.
• It is_to say that Cold Goose’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, $3,485,500 and $4,284,812, respectively. This is because___of the items reported in the income statement involve payments and receipts of cash.

D. It is CORRECT to say that Cute Camel’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 $2,087,000 and $2,539,250 repectively . This is because RECONCILIATION of the items that was reported in the income statement involve both payments and the receipts of cash

Explanation:

Preparation of Income statement for the year ending December 31

FIrst step is to prepare the forecasted income statement for Year 2

Cute Camel Woodcraft company

Income statement for the year ending December 31

Year 1 Year 2 (Forecasted)

Net sales$15,000,000 18,750,000

(15,000,000 * 125%=18,750.000)

Less: Operating costs, except depreciation and amortization

9,000,000 11,250,000

(18,750,000 * 60%=11,250,000)

Less: Depreciation and amortization expenses

600,000 600,000

Operating income (or EBIT)

$5,400,000 6,900,000

(15,000,000-9,000,000-600,000=5,400,000)

(18,750,000-11,250,000-600,000=6,900,000)

Less: Interest expense

540,000 1,035,000

(6,900,000 * 15%=1,035,000)

Pre-tax income (or EBT)

4,860,000 5,865,000

($5,400,000 -540,000=4,860,000)

(6,900,000 -1,035,000=5,865,000)

Less: Taxes (25%)

1,215,000 1,466,250

(5,865,000 * 25%=1,466,250)

Earnings after taxes

$3,645,000 4,398,750

(4,860,000 -1,215,000=$3,645,000)

(5,865,000-1,466,250=4,398,750)

Less: Preferred stock dividends

100,000 100,000

Earnings available to common shareholders

3,545,000 4,298,750

($3,645,000-100,000=3,545,000)

( 4,398,750-100,000=4,298,750)

Less: Common stock dividends

1,458,000 1,759,500

Contribution to retained earnings

$2,087,000 $2,539,250

(3,545,000-1,458,000=$2,087,000)

(4,298,750-1,759,500=$2,539,250)

A. In Year 2, each preferred share should expect to receive $20 per share in annual dividend calculated as :

Preferred share= 100,000/5000

Preferred share= $20 per share in annual dividend

B. The firm’s earnings per share (EPS) is expected to change from 8.8625 in Year 1 to 10.7468 in Year 2 Calculated as:

Year 1 earnings per share=3,545,000/400,000 Year 1 earnings per share= 8.8625

Year 2 earnings per share=4,298,750/400,000

Year 2 earnings per share= 10.7468

C. EBITDA value changed from $6,000,000 in Year 1 to $7,500,000 in Year 2 calculated as:

Year 1 (EBITDA)=5,400,000 + 600,000

Year 1 (EBITDA)= $6,000,000

Year 2 (EBITDA)= 6,900,000 + 600,000

Year 2 (EBITDA) = $7500,000

D. It is CORRECT to say that Cute Camel’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 $2,087,000 and $2,539,250repectively . This is because RECONCILIATION of the items that was reported in the income statement involve both payments and the receipts of cash