Question

Assume sales for Peach Street Industries are expected to increase by 8.00% from 2015 to 2016. Peach Street is operating at full capacity currently and expected assets-to-sales and spontaneous liabilities-to-sales to remain the same. Additionally, the firm is looking to maintain their 2015 net profit margin and dividend payout ratios for 2016. The firm’s tax rate is 38.00% and selected income statement and balance sheet information for 2015 is provided below:

Entry	Value	Entry	Value
Current Assets	$800.00	Sales	$2,500.00
Net Fixed Assets (NFA)	$700.00	Operating Costs	$2,030.00
Total Assets	$1,500.00	Depreciation	$90.00
Accounts Payable and Accruals	$30.00	Interest Expense	$69.00
Notes Payable	$180.00	Dividends Paid	$93.30
Long term debt	$510.00
Total Equity	$780.00

What is the firm’s net income for 2015?

Answer 1

Compute the income before taxes, using the equation as shown below:

Income before taxes = Sales – Operating costs – Depreciation – Interest expense

                                 = $2,500 - $2,030 - $90 - $69

                                 = $311

Hence, the income before taxes is $311.

Compute the net income, using the equation as shown below:

Net income = Income before taxes*(1 – Tax rate)

                   = $311*(1 – 0.38)

                   = $192.82

Hence, the net income is $192.82.