Question

Green Caterpillar Garden Supplies 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 1.
1. Green Caterpillar 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 65% of net sales, and its depreciation and amortization expenses remain constant from year to year
3. The company's tax rate remains constant at 40% of its pre-tax income or earnings before taxes (EBT)
4. In Year 2, Green Caterpillar expects to pay $100,000 and $2,432,700 of preferred and common stock dividends, respectively
Complete the Year 2 income statement data for Green Caterpillar, then answer the questions that follow. Be sure to round each dollar value to the nearest whole dollar
Green Caterpillar Garden Supplies Inc.
Income Statement for Year Ending December 31
Year 1 Year 2 (Forecasted)
Net sales $30,000,000 _ _ _
_Less: Operating costs, except depreciation and amortization 19,500,000 _ _ _
_Less: Depreciation and amortization expenses 1,200,000 1,200,000
Operating income (or EBIT) $9,300,000 _ _ _
_Less: Interest expense 930,000 _ _ _
Pre-tax income (or EBT) 8,370,000 _ _ _
_ Less: Taxes (40%) 3,348,000 _ _ _
Earnings after taxes $5,022,000 _ _ _
_Less: Preferred stock dividends 100,000 _ _ _
Earnings available to common shareholders 4,922,000 _ _ _
_Less: Common stock dividends 2,008,800 _ _ _
Contribution to retained earnings $2,913,200 $3,549,050
Given the results of the previous income statement calculations, complete the following statements:
-In Year 2, if Green Caterpillar has 5,000 shares of preferred stocks issued and outstanding, then each preferred share should expect to receive _ _ _ in annual dividends.
-If Green Caterpillas 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.
-Green Caterpillar's before interest, taxes, depreciation and amortization (EBITDA) value changed from _ _ _ in Year 1 to _ _ _ in Year 2.
-It is _ _ _ to say that Green Caterpillar's net inflows and outflows of cash at the end of Tears 1 and 2 are equal to the company's annual contribution to retained earnings, $2,913,200 and $3,549,050, respectively. This is because _ _ _ of the item reported in the income statement involve payments and receipts of cash.

Answer 1

Answer:

Green Caterpillar Garden Supplies Inc.

a) Income Statement for Year Ending December 31

                                                              Year 1              Year 2 (Forecasted)

Net sales                                              $30,000,000       $37,500,000

Less: Operating costs                            19,500,000          24,375,000

Depreciation &amortization expenses    1,200,000            1,200,000

Operating income (or EBIT)                  $9,300,000         $11,925,000

Less: Interest expense                              930,000              1,788,750

Pre-tax income (or EBT)                          8,370,000            10,136,250

Less: Taxes (40%)                                   3,348,000             4,054,500

Earnings after taxes                            $5,022,000            $6,081,750

Less: Preferred stock dividends               100,000                 100,000

Earnings to common shareholders      4,922,000              5,981,750

Less: Common stock dividends           2,008,800              2,432,700

Contribution to retained earnings      $2,913,200           $3,549,050

b) In Year 2, if Green Caterpillar has 5,000 shares of preferred stocks issued and outstanding, then each preferred share should expect to receive _ $20 _ in annual dividends.

-If Green Caterpillars has 400,000 shares of common stock issued and outstanding, then the firm's earnings per share (EPS) is expected to change from _ $12.31 _ in Year 1 to _ $14.95 _ in Year 2.

-Green Caterpillar's before interest, taxes, depreciation and amortization (EBITDA) value changed from _ $10,500,000 _ in Year 1 to _ $13,125,000_ in Year 2.

-It is _ wrong _ to say that Green Caterpillar'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, $2,913,200 and $3,549,050, respectively. This is because _ not all_ of the items reported in the income statement involve payments and receipts of cash.

Explanation:

a) The preferred dividend per share = Preferred Dividends divided the number of preferred stock shares.

b) The EPS is the Earnings Per Share and is calculated as Net Income to Common Stockholders divided by the number of common stock shares outstanding.

The operating cost figure may not be based on a cash basis.  It could be accrued costs.  Similarly, the net sales may as well involve sales on credit, which do not involve cash flows.