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).
