Question

Model Corp.'s most recent balance sheet and income statement are given below (all numbers in $ million):

Assets			Liabilities and Equity
Cash	41		Accounts payable	123
Accounts receivable	82		Current liabilities	123
Inventory	123		Long-term debt	164
Current assets	246		Total liabilities	287
Machinary	164		Equity	123
Total assets	410		Total liab. & equity	410

Income statement
Sales	90
Costs	54
Depreciation	18
EBIT	18
Interest	4.92
Taxable income	13.08
Taxes	4.447
Net income	8.63

Sales, assets and costs (including depreciation) are expected to grow by 37% next year, while the tax rate and long-term debt will stay constant. The company will pay out 50% of net income as dividends next year.

  Attempt 1/10 for 10 pts.

Part 1

Using the percentage of sales method, what will be the net income next year (in $ million)?

Answer 1

Preparing the Income Statement for next year Using the percentage of sales method:-

Particular		Projected ($ in millions)
Sales	90*(1+37%)	123.300
COGS	54*(1+37%)	(73.980)
Gross Profit		49.320
Depreciation	18*(1+37%)	(24.660)
EBIT		24.660
interest	Remains same	(4.920)
Taxable Income		19.740
Taxation (34%)	Remains same	(6.712)
Net income		13.028

Note- 1. Sales, assets and costs (including depreciation) are expected to grow by 37% next year

2. Interest expense will remain same as Long term debt is constant. So, Interest on same Long-term debt will be same as last year.

3. Tax rate will remain same. Tax rate = Taxes/Taxable income

Tax rate = $4.447/$13.08 = 34%

So, net Income for next year is $13.028 millions