Answer:
Cold Goose Metal Works Inc.
a. Preferred Dividend per share = $40 ($200,000/5,000)
b. EPS changed from $12.66 to $15.52
c. EBITDA changed from $9,000,000 to $11,250,000
d. It is incorrect 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 ALL BUT ONE of the items reported in the income statement involve payments and receipts of cash.
Explanation:
a) Data and Calculations:
Income Statement for Year Ending December 31
Year 1 Year 2 (Forecasted)
Net sales $30,000,000 $37,500,000
Less: Operating costs,
except depreciation and amortization 21,000,000 26,250,000
Less: Depreciation and
amortization expenses 1,200,000 1,200,000
Operating income (or EBIT) $7,800,000 10,050,000
Less: Interest expense 780,000 1,507,500
Pre-tax income (or EBT) 7,020,000 8,542,500
Less: Taxes (25%) 1,755,000 2,135,625
Earnings after taxes $5,265,000 $6,406,875
Less: Preferred stock dividends 200,000 200,000
Earnings available to common shareholders 5,065,000 6,206,875
Less: Common stock dividends 1,579,500 1,922,063
Contribution to retained earnings $3,485,500 $4,284,812
Year 2 (Forecasted)
1. Net sales $37,500,000 ($30,000,000 * 1.25)
2. Interest expense $1,507,500 ($10,050,000 * 15%)
3. Operating cost = $26,250,000 ($37,500,000 * 70%)
4. Income tax expense = $2,135,625 ($8,542,500 * 25%)
Year 1: Earnings per share $12.66 (5,065,000/400,000)
Year 2: Earnings per share = $15.52 (6,206,875/400,000)
