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 <u>$40</u> 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 <u>$12.06</u> in Year 1 to <u>$14.70</u> 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 <u>$10,500,000</u> in Year 1 to <u>$13,125,000</u> in Year 2.
$30,000,000 - $19,500,000 = $10,500,000
$37,500,000 - $24,375,000 = $13,125,000
4. It is <u>incorrect</u> 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 <u>all but one</u> 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)
<u>fixed costs (1,200,000)</u>
EBIT 11,925,000
<u>interest expense (1,788,750)</u>
Pretax income 10,136,250
<u>income taxes (4,054,500)</u>
net income 6,081,750
preferred stock dividends 200,000
common stock dividends 1,824,525
