Question

You have been given the following information for Kellygirl’s Athletic Wear Corp. for the year 2015:

a. Net sales = $38,750,000.

b. Cost of goods sold = $22,190,000.

c. Other operating expenses = $6,100,000.

d. Addition to retained earnings = $1,207,500.

e. Dividends paid to preferred and common stockholders = $1,935,500.

f. Interest expense = $1,835,000.

g. The firm’s tax rate is 30 percent.

h. In 2016, net sales are expected to increase by $9.75 million.

i. Cost of goods sold is expected to be 60 percent of net sales.

j. Depreciation and other operating expenses are expected to be the same as in 2015.

k. Interest expense is expected to be $2,110,000.

l. The tax rate is expected to be 30 percent of EBT.

m. Dividends paid to preferred and common stockholders will not change.

Calculate the addition to retained earnings expected in 2016.

Answer 1

		$
Net Sales		48,500,000
Less:	Cost of goods sold	29,100,000
Gross profit		19,400,000
Less:	other operating expenses	6,100,000
	Depreciation*	4,135,000
EBIT		9,165,000
Less:	Interest	2,110,000
Income Before Income Tax (EBT)		7,055,000
Less: Income Tax		2,116,500
Net Income		4,938,500
Less: Dividend		1,935,500
Addition to retained earnings		3,003,000

*Calculation of depreciation in 2015

EBT (2015) = (Addition to retained earnings+Dividend)/(1-tax rate)

= (1207500 + 1935500)/.7

= 4490000

EBIT = EBT + interest

= 4490000+1835000

= 6325000

Depreciation = Gross profit-EBIT-other operating expenses

= 16560000-6325000-6100000

= 4135000