In: Finance
1. | 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). |
2. | The company’s operating costs (excluding depreciation and amortization) remain at 70% of net sales, and its depreciation and amortization expenses remain constant from year to year. |
3. | The company’s tax rate remains constant at 25% of its pre-tax income or earnings before taxes (EBT). |
4. | In Year 2, Cold Goose expects to pay $200,000 and $1,922,063 of preferred and common stock dividends, respectively. |
Complete the Year 2 income statement data for Cold Goose, then answer the questions that follow. Be sure to round each dollar value to the nearest whole dollar.
Cold Goose Metal Works Inc. |
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Income Statement for Year Ending December 31 |
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Year 1 | Year 2 (Forecasted) | |
Net sales | $30,000,000 | |
Less: Operating costs, except depreciation and amortization | 21,000,000 | |
Less: Depreciation and amortization expenses | 1,200,000 | 1,200,000 |
Operating income (or EBIT) | $7,800,000 | |
Less: Interest expense | 780,000 | |
Pre-tax income (or EBT) | 7,020,000 | |
Less: Taxes (25%) | 1,755,000 | |
Earnings after taxes | $5,265,000 | |
Less: Preferred stock dividends | 200,000 | |
Earnings available to common shareholders | 5,065,000 | |
Less: Common stock dividends | 1,579,500 | |
Contribution to retained earnings | $3,485,500 | $4,284,812 |
Given the results of the previous income statement calculations, complete the following statements:
• | In Year 2, if Cold Goose has 5,000 shares of preferred stock issued and outstanding, then each preferred share should expect to receive ?? in annual dividends. |
• | If Cold Goose has 400,000 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 earnings 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, $3,485,500 and $4,284,812, respectively. This is because ?? of the items reported in the income statement involve payments and receipts of cash. |