Question

(Forecasting net income​) In November of each​ year, the CFO of Barker Electronics begins the financial forecasting process to determine the​ firm's projected needs for new financing during the coming year. Barker is a small electronics manufacturing company located in​ Moline, Illinois, which is best known as the home of the John Deere Company. The CFO begins the process with the most recent​ year's income​ statement, projects sales growth for the coming​ year, and then estimates net income and finally the additional earnings he can expect to retain and reinvest in the firm. The​ firm's income statement for 2015​ follows:

Income Statement
	12/31/2015
Sales	$1,400,000
Cost of goods sold	980,000
Gross profit	$420,000
Operating costs	210,000
Depreciation expense	50,000
Net operating profit	$160,000
Interest expense	11,000
Earnings before taxes	$149,000
Taxes	44,700
Net income	$104,300
Dividends	$20,000
Addition to retained earnings	$84,300

The electronics business has been growing rapidly over the past 18 months as the economy​ recovers, and the CFO estimates that sales will expand by 18 percent in the next year. In​ addition, he estimates the following relationships between each of the income statement expense items and​ sales:

​COGS/sales		70​%
Operating​ expenses/sales		15​%
Depreciation expense	​	$50,000
Interest expense	​	$11,000
Tax rate		30%

Note that for the coming year both depreciation expense and interest expense are projected to remain the same as in 2015.

a. Estimate​ Barker's net income for 2016 and its addition to retained earnings under the assumption that the firm leaves its dividends paid at the 2015 level.

What is the estimate of​ Barker's net income for​ 2016?

b. Reevaluate​ Barker's net income and addition to retained earnings if sales grow at 36 percent over the coming year.​ However, this scenario requires the addition of new plant and equipment in the amount of $110,000​, which increases annual depreciation to $56,000 per​ year, and interest expense rises to $16,000.

Answer 1