Last year, Your Company, Inc. had sales of $750,000, with a costof goods sold of...

Last year, Your Company, Inc. had sales of $750,000, with a cost of goods sold of $350,000. Your Company's operating expenses were $200,000, and its increase in retained earnings was $75,000. There are currently 25,000 common stock shares outstanding and Your Company paid dividends of $ 1.00 per share.

a) Assuming the firm's earnings are taxed at 35 percent, construct the firm's income statement:

b) Compute the firm's operating profit margin (%):

c) Compute the firm's times interest earned

Solutions

Expert Solution

- Increase in Retained earnings = $75,000

- Dividend paid during the year = No of shares*Dividend per share

= $25000*$1

= $25,000

Net Income = Increase in Retained earnings + Dividend paid during the year

= $75,000 + $25,000

= $100,000

Income before Tax = Net Income/(1-Tax Rate)

= $100,000/(1-0.35)

= $153,846.15

a). Preparing Firm's Income Statement:-

Particular	Amount in $
Sales	750,000.00
COGS	(350,000.00)
Gross Profit	400,000.00
Operating exp.	(200,000.00)
EBIT	200,000.00
interest Expenses (Note)	46,153.85
Taxable Income	153,846.15
Taxation (35%)	(53,846.15)
Net income	100,000.00

Note- Interest expenses =EBIT - Income before Tax

= $200,000 - $153,846.15 = $46,153.85

b). Operating Profit Margin = Operating profit(or EBIT)/Net sales

= $200,000/$750,000

Operating Profit Margin = 26.67%

c). Firm's Times Interest earned = EBIT/Interest expenses

= $200,000/$46,153.85

Firm's Times Interest earned = 4.33 times

jeff jeffy answered 1 year ago

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