Question

In: Finance

Sales $3,000,000 Operating costs (excluding depreciation) 1,500,000 Gross margin $1,500,000 Depreciation 500,000 EBIT $1,000,000 Interest 500,000...

Sales $3,000,000

Operating costs (excluding depreciation) 1,500,000

Gross margin $1,500,000

Depreciation 500,000

EBIT $1,000,000

Interest 500,000

EBT $500,000

Taxes 200,000

Net income $ 300,000

The company’s president is disappointed with the forecast and would like to see the company generate higher sales and a forecasted net income of $750,000. Assume that the president wants to maintain the same proportion of operating costs (excluding depreciation). Also, assume that depreciation and the company’s tax rate will remain the same. The president wants to reduce the interest expense by $150,000. What should be the level of sales to satisfy the president? a) $4,200,000 b) $3,816,666.67 c) $3,100,000 d) $4,236,666.67 e) None of the above

Solutions

Expert Solution

Option (a) is the answer.

First we calculate the tax rate. It will be used in the forecasted figures.

Current tax rate = Tax / EBT * 100

Current tax rate = 200000 / 500000 * 100 = 0.4 * 100 = 40%

Next we will calculate the proportion of operating cost to gross margin. It will be used in forecasted figures.

Operating cost to gross margin ratio = Operating cost / Gross margin * 100

Operating cost to gross margin ratio = 1500000 / 1500000 * 100 = 100%

Now,Forecasted net income (given) = 750000

EBT = Forecasted net income / (1- tax rate)

EBT = 750000 / (1-40%)

EBT = 750000 / 0.6

EBT = 1250000

New interest expense = 500000 - 150000 = 350000

So, New / forecasted EBIT will be calculated as per below equation:

EBT = EBIT - Interest

1250000 = EBIT - 350000

EBIT = 1250000 + 350000

EBIT = 1600000, which is the new or forecasted EBIT.

Depreciation (given) = 500000

New / forecasted Gross margin will be calculated as per below equation:

EBIT = Gross margin - Depreciation

1600000 = Gross margin - 500000

Gross Margin = 1600000 + 500000 = 2100000

Operating cost = 100% of gross margin (as calculated above, in the beginning)

New Operating cost = 2100000

New / forecasted sales will be calculated as per below equation:

Gross margin = Sales - Operating cost

2100000 = Sales - 2100000

Sales = 2100000 + 2100000

Sales = 4200000

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

Hermann Industries is forecasting the following income statement: Sales $4,000,000 Operating costs excluding depreciation & amortization...
Hermann Industries is forecasting the following income statement: Sales $4,000,000 Operating costs excluding depreciation & amortization 2,200,000 EBITDA $1,800,000 Depreciation and amortization 440,000 EBIT $1,360,000 Interest 240,000 EBT $1,120,000 Taxes (40%) 448,000 Net income $672,000 The CEO would like to see higher sales and a forecasted net income of $1,142,400. Assume that operating costs (excluding depreciation and amortization) are 55% of sales and that depreciation and amortization and interest expenses will increase by 8%. The tax rate, which is 40%,...
Edmonds Industries is forecasting the following income statement: Sales $8,000,000 Operating costs excluding depreciation & amortization...
Edmonds Industries is forecasting the following income statement: Sales $8,000,000 Operating costs excluding depreciation & amortization 4,400,000 EBITDA $3,600,000 Depreciation and amortization 480,000 EBIT $3,120,000 Interest 400,000 EBT $2,720,000 Taxes (25%) 680,000 Net income $2,040,000 The CEO would like to see higher sales and a forecasted net income of $4,000,000. Assume that operating costs (excluding depreciation and amortization) are 55% of sales and that depreciation and amortization and interest expenses will increase by 14%. The tax rate, which is 25%,...
Edmonds Industries is forecasting the following income statement: Sales $7,000,000 Operating costs excluding depreciation & amortization...
Edmonds Industries is forecasting the following income statement: Sales $7,000,000 Operating costs excluding depreciation & amortization 3,850,000 EBITDA $3,150,000 Depreciation and amortization 980,000 EBIT $2,170,000 Interest 420,000 EBT $1,750,000 Taxes (25%) 437,500 Net income $1,312,500 The CEO would like to see higher sales and a forecasted net income of $2,490,000. Assume that operating costs (excluding depreciation and amortization) are 55% of sales and that depreciation and amortization and interest expenses will increase by 6%. The tax rate, which is 25%,...
Edmonds Industries is forecasting the following income statement: Sales $9,000,000 Operating costs excluding depreciation & amortization...
Edmonds Industries is forecasting the following income statement: Sales $9,000,000 Operating costs excluding depreciation & amortization 4,950,000 EBITDA $4,050,000 Depreciation and amortization 1,170,000 EBIT $2,880,000 Interest 900,000 EBT $1,980,000 Taxes (25%) 495,000 Net income $1,485,000 The CEO would like to see higher sales and a forecasted net income of $2,350,000. Assume that operating costs (excluding depreciation and amortization) are 55% of sales and that depreciation and amortization and interest expenses will increase by 13%. The tax rate, which is 25%,...
Edmonds Industries is forecasting the following income statement: Sales $7,000,000 Operating costs excluding depreciation & amortization...
Edmonds Industries is forecasting the following income statement: Sales $7,000,000 Operating costs excluding depreciation & amortization 3,850,000 EBITDA $3,150,000 Depreciation and amortization 1,050,000 EBIT $2,100,000 Interest 700,000 EBT $1,400,000 Taxes (25%) 350,000 Net income $1,050,000 The CEO would like to see higher sales and a forecasted net income of $1,320,000. Assume that operating costs (excluding depreciation and amortization) are 55% of sales and that depreciation and amortization and interest expenses will increase by 15%. The tax rate, which is 25%,...
Edmonds Industries is forecasting the following income statement: Sales $7,000,000 Operating costs excluding depreciation & amortization...
Edmonds Industries is forecasting the following income statement: Sales $7,000,000 Operating costs excluding depreciation & amortization 3,850,000 EBITDA $3,150,000 Depreciation and amortization 350,000 EBIT $2,800,000 Interest 700,000 EBT $2,100,000 Taxes (25%) 525,000 Net income $1,575,000 The CEO would like to see higher sales and a forecasted net income of $1,920,000. Assume that operating costs (excluding depreciation and amortization) are 55% of sales and that depreciation and amortization and interest expenses will increase by 14%. The tax rate, which is 25%,...
Edmonds Industries is forecasting the following income statement: Sales $7,000,000 Operating costs excluding depreciation & amortization...
Edmonds Industries is forecasting the following income statement: Sales $7,000,000 Operating costs excluding depreciation & amortization 3,850,000 EBITDA $3,150,000 Depreciation and amortization 350,000 EBIT $2,800,000 Interest 350,000 EBT $2,450,000 Taxes (40%) 980,000 Net income $1,470,000 The CEO would like to see higher sales and a forecasted net income of $1,837,500. Assume that operating costs (excluding depreciation and amortization) are 55% of sales and that depreciation and amortization and interest expenses will increase by 8%. The tax rate, which is 40%,...
Income Statement Hermann Industries is forecasting the following income statement: Sales $10,000,000 Operating costs excluding depreciation...
Income Statement Hermann Industries is forecasting the following income statement: Sales $10,000,000 Operating costs excluding depreciation & amortization 5,500,000 EBITDA $4,500,000 Depreciation and amortization 1,200,000 EBIT $3,300,000 Interest 900,000 EBT $2,400,000 Taxes (40%) 960,000 Net income $1,440,000 The CEO would like to see higher sales and a forecasted net income of $1,728,000. Assume that operating costs (excluding depreciation and amortization) are 55% of sales and that depreciation and amortization and interest expenses will increase by 9%. The tax rate, which...
The MacCauley Company has sales of $200 million and total operating expenses (excluding depreciation) of $130...
The MacCauley Company has sales of $200 million and total operating expenses (excluding depreciation) of $130 million. Straight-line depreciation on the company's assets is $15 million over 4 years. The Upfront Cost equals to the total depreciable value on the company’s assets. Assume that all taxable income is taxed at 30 percent. Assume also that net operating working is 3% of sales in each year. Calculate the MacCauley Company's WACC using 4% cost of debt, 12% cost of equity. There...
Pearl Corp. is expected to have an EBIT of $3,000,000 next year. Depreciation, the increase in...
Pearl Corp. is expected to have an EBIT of $3,000,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $160,000, $135,000, and $175,000, respectively. All are expected to grow at 20 percent per year for four years. The company currently has $15,500,000 in debt and 1,350,000 shares outstanding. After Year 5, the adjusted cash flow from assets is expected to grow at 3.5 percent indefinitely. The company’s WACC is 8.6 percent and the...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT