Question

Click here to read the eBook: Forecasted Financial Statements PRO FORMA INCOME STATEMENT Austin Grocers recently reported the following 2016 income statement (in millions of dollars): Sales $700 Operating costs including depreciation 500 EBIT $200 Interest 40 EBT $160 Taxes (40%) 64 Net income $96 Dividends $32 Addition to retained earnings $64 For the coming year, the company is forecasting a 35% increase in sales, and it expects that its year-end operating costs, including depreciation, will equal 65% of sales. Austin's tax rate, interest expense, and dividend payout ratio are all expected to remain constant. What is Austin's projected 2017 net income? Enter your answer in millions. For example, an answer of $13,000,000 should be entered as 13. Round your answer to two decimal places. $ million What is the expected growth rate in Austin's dividends? Do not round your intermediate calculations. Round your answer to two decimal places.

Answer 1

Answer a

- Sales = 700

growth rate = 35%

Forecasted Sales = 700*1.35 = 945

- Year Ending operating cost including depreciation = 65% of sales

Forecasted operating cost including depreciation = 945*65% = 614.25

- Current Dividend payout ratio = Dividend paid / net income

= 32/96 = 33.33%

Forecasted Dividend = Net income * dividend payout ratio = 174.45*33.33% = 58.15

- Keeping the interest expense, tax rate , dividend payout ratio same :

	Current	Forecasted
Sales	700.00	945
Operating costs including depreciation	500.00	614.25
EBIT	$200	330.75
Interest	40.00	40.00
EBT	$160	290.75
Taxes (40%)	64.00	116.3
Net income	96.00	174.45
Dividends	32.00	58.15
Addition to retained earnings	$64	116.30

Net income = $174.45 million

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Answer C

Year 1 dividends = 32

Year 2 dividend = 58.15 ( calculation of this dividend explained in answer a)

Dividend growth rate = (Year 2 dividend/Year1 dividend) - 1

= (58.15/32)-1

= 1.8171875 - 1 = 81.72%

Hope this helps!!!