Question

Cold Goose Metal Works Inc.’s income statement reports data for its first year of operation. The firm’s CEO would like sales to increase by 25% next year.

Cold Goose is able to achieve this level of increased sales, but its interest costs increase from 10% to 15% of earnings before interest and taxes (EBIT).

The company’s operating costs (excluding depreciation and amortization) remain at 70.00% of net sales, and its depreciation and amortization expenses remain constant from year to year.

The company’s tax rate remains constant at 40% of its pre-tax income or earnings before taxes (EBT).

In Year 2, Cold Goose expects to pay $100,000 and $896,963 of preferred and common stock dividends, respectively

Cold Goose Metal Works Inc.
Income Statement for Year Ending December 31
	Year 1	Year 2 (Forecasted)
Net sales	$15,000,000
Less: Operating costs, except depreciation and amortization	10,500,000
Less: Depreciation and amortization expenses	600,000	600,000
Operating income (or EBIT)	$3,900,000
Less: Interest expense	390,000
Pre-tax income (or EBT)	$3,510,000
Less: Taxes (40%)	1,404,000
Earnings after taxes	$2,106,000
Less: Preferred stock dividends	100,000
Earnings available to common shareholders	$2,006,000
Less: Common stock dividends	737,100
Contribution to retained earnings	$1,109,037	$1,565,787

Given the results of the previous income statement calculations, complete the following statements:

•	In Year 2, if Cold Goose has 10,000 shares of preferred stock issued and outstanding, then each preferred share should expect to receive   in annual dividends.
•	If Cold Goose has 500,000 shares of common stock issued and outstanding, then the firm’s earnings per share (EPS) is expected to change from   in Year 1 to   in Year 2.
•	Cold Goose’s before interest, taxes, depreciation and amortization (EBITDA) value changed from   in Year 1 to   in Year 2.
•	It is   to say that Cold Goose’s net inflows and outflows of cash at the end of Years 1 and 2 are equal to the company’s annual contribution to retained earnings, $1,109,037 and $1,565,787, respectively. This is because   of the items reported in the income statement involve payments and receipts of cash.

Answer 1