Question

Cute Camel Woodcraft Company's income statement reports data for its 1st year of operation. The Firm's CEO would like sales to increase by 25% next year. Cute Camel is able to achieve this level of increased sales, but its interest costs increase from 10% to 15% of earnings before interest & taxes (EBIT). The company's operating costs (excluding depreciation & amortization) remain at 65% of net sales, & its depreciation & amortization expenses remain constant from year to year. The company's tax rate remains constant at 40% of its pre-tax income or earnings before taxes (EBT). In year 2, Cute Camel expects to pay $300,000 & $1,824,525 of preferred & common stock dividends, respectively. Complete the Year 2 income statement data & then answer the questions that follow. Round each dollar value to the nearest whole dollar.Year 1 Year 2 (Forecasted)Net Sales $20,000,000        Less: operating costs, except depreciation & amortization 13,000,000       Less: depreciation & amortization expenses 800,000Operating Income (EBIT) $6,200,000        Less: interest expense 620,000Pre-Tax Income (EBT) 5,580,000      Less: taxes (40%) 2,232,000Earnings after taxes $3,348,000        Less: preferred stock dividends 300,000Earnings available to common shareholders 3,048,000       Less: common stock dividends 1,506,600Contribution to Retained Earnings $1,541,400 Given the results of the previous income statement calculations, complete the following statements:a. In year 2, if cute camel has 25,000 shares of preferred stock issued & outstanding, then each preferred share should expect to receive ($12, $30, $18 or $24) in annual dividends.b. If cute camel has 200,000 shares of common stock issued & outstanding, then the firm's earnings per share (EPS) is expected to change from ($31, $16.74, $27.90 or $15.24) in year 1 to ($33.79, $39.75, $18.77 or $20.27) in year 2.c. Cute camel's before interest, taxes, depreciation & amortization (EBITDA) value changed from ($9.5M, $7M, $19.2M or $8.4M) in year 1 to ($8.7M, $20M, $12M or $26M) in year 2.d. It is (CORRECT or INCORRECT) to say that cute camel's net inflows & outflows of cash at the end of years 1 & 2 are equal to the company's annual contribution to retained earnings, $1,541,400 & $1,929,975 respectively. This is because (ALL or ALL BUT ONE) of the item reported in the income statement involve payments & receipts of cash

Answer 1

Answer:

Cute Camel Woodcraft Company

1. Cute Camel Woodcraft Company

Forecasted Income Statement for Year 2:

                                                              Year 1           Year 2 (Forecasted)

Net Sales                                       $20,000,000           $25,000,000  

Less: operating costs, except

 depreciation & amortization         13,000,000               16,250,000    

Less: depreciation &

 amortization expenses                     800,000                    800,000

Operating Income (EBIT)              $6,200,000               $7,950,000

Less: interest expense                      620,000                   1,192,500

Pre-Tax Income (EBT)                     5,580,000                  6,757,500  

Less: taxes (40%)                            2,232,000                 2,703,000

Earnings after taxes                     $3,348,000               $4,054,500  

Less: preferred stock dividends      300,000                     300,000

Earnings available to

   common shareholders              3,048,000                  3,754,500  

Less: common stock dividends     1,506,600                   1,824,525

Retained Earnings                        $1,541,400                 $1,929,975

2a. With 25,000 shares of preferred stock issue and outstanding, then each preferred share should expect to receive $12 in annual dividends.

2b. With 200,000 shares of common stock issued and outstanding, then the firm's earnings per share (EPS) is expected to change from $15.24 in year 1 to $18.77 in year 2.

2c. Cute camel's before interest, taxes, depreciation & amortization (EBITDA) value changed from $7M in year 1 to $8.7M in year 2.

2d.  It is INCORRECT to say that cute camel's net inflows & outflows of cash at the end of years 1 & 2 are equal to the company's annual contribution to retained earnings, $1,541,400 & $1,929,975 respectively. This is because ALL BUT ONE of the item reported in the income statement involve payments & receipts of cash

Explanation:

a) Data and Calculations:

                                                              Year 1           Year 2 (Forecasted)

Net Sales                                       $20,000,000           $25,000,000  

Less: operating costs, except

 depreciation & amortization         13,000,000               16,250,000    

Less: depreciation &

 amortization expenses                     800,000                    800,000

Operating Income (EBIT)              $6,200,000               $7,950,000

Less: interest expense                      620,000                   1,192,500

Pre-Tax Income (EBT)                     5,580,000                  6,757,500  

Less: taxes (40%)                            2,232,000                 2,703,000

Earnings after taxes                     $3,348,000               $4,054,500  

Less: preferred stock dividends      300,000                     300,000

Earnings available to

   common shareholders              3,048,000                  3,754,500  

Less: common stock dividends     1,506,600                   1,824,525

Retained Earnings                        $1,541,400                 $1,929,975

Preferred Stockholders' Dividends per share

= $300,000/25,000 = $12

EPS (Earnings per share):

= Earnings available to common shareholders  = $15.24 ($3,048,000/200,000)  in year 1   and $18.77 ($3,754,500/200,000) in year 2.

Cute Camel's Earnings before interest, taxes, depreciation & amortization (EBITDA) for year 1 is $7M ($20M - $13M) while the year 2's is $8.75M ($25M - $16.25M).