Question

1. In Year 2, if Blue Hamster has 5,000 shares of preferred stock issued and outstanding, then each preferred share should expect to receive _____ in annual dividends.
Options: $60 or $40 or $80 or $100
2. If Blue Hamster has 400,000 shares of common stock issued and outstanding, then the firm’s earnings per share (EPS) is expected to change from ___(A)__ in Year 1 to___(B)____ in Year 2.
Option for A: $12.56 or $23.25 or $12.06 or $20.93
Option for B: $25.34 or $14.70 or $15.20 or $29.81
3. Blue Hamster’s before interest, taxes, depreciation and amortization (EBITDA) value changed from (A)_____ in Year 1 to ___(B)____ in Year 2.
Option A: $ 12,648,000 or $28,800,000 or $14,322,000 or $10,500,000
Option B: $18,006,750 or $13,125,000 or $39,288,750 or $30,456,750
4. It is ____(A)_____ to say that Blue Hamster’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. This is because __(B)_____ of the item reported in the income statement involve payments and receipts of cash.
Option A: correct or incorrect
Option B: all but one or all

Answer 1

Answer:

1. In Year 2, if Blue Hamster has 5,000 shares of preferred stock issued and outstanding, then each preferred share should expect to receive $40 in annual dividends.

$200,000 / 5,000 = $40

2. If Blue Hamster has 400,000 shares of common stock issued and outstanding, then the firm’s earnings per share (EPS) is expected to change from $12.06 in Year 1 to $14.70 in Year 2.

$4,822,000 / 400,000 = $12.055

$5,881,750 / 400,000 = $14.70

3. Blue Hamster’s before interest, taxes, depreciation and amortization (EBITDA) value changed from $10,500,000 in Year 1 to $13,125,000 in Year 2.

$30,000,000 - $19,500,000 = $10,500,000

$37,500,000 - $24,375,000 = $13,125,000

4. It is incorrect to say that Blue Hamster’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. This is because all but one of the item reported in the income statement involve payments and receipts of cash.

depreciation and amortization expenses are not cash outflows.

Explanation:

this question is incomplete and we must prepare the income statement for next year:

sales 37,500,000

variable costs (24,375,000)

fixed costs (1,200,000)

EBIT 11,925,000

interest expense (1,788,750)

Pretax income 10,136,250

income taxes (4,054,500)

net income 6,081,750

preferred stock dividends 200,000

common stock dividends 1,824,525