Cute Camel Woodcraft Company’s income statement reports data for its first year of operation. The firm’s CEO would like sales to increase by 25% next year. 1. Cute Camel is able to achieve this level of increased sales, but its interest costs increase from 10% to 15% of earnings before interest and taxes (EBIT).
2. The company’s operating costs (excluding depreciation and amortization) remain at 60% of net sales, and its depreciation and amortization expenses remain constant from year to year.
3. The company’s tax rate remains constant at 25% of its pre-tax income or earnings before taxes (EBT).
4. In Year 2, Cute Camel expects to pay $100,000 and $1,759,500 of preferred and common stock dividends, respectively.
Complete the Year 2 income statement data for Cute Camel.
Cute Camel Woodcraft Company
Income Statement for Year Ending December 31
Year 1 Year 2 (forecasted)
Net sales $15,000,000
Less: Operating costs, except
depreciation and amortization 9,000,000
Less: Depreciation and
amortization expenses 600,000 600,000
Operating income (or EBIT) $5,400,000
Less: Interest expense 540,000
Pre-tax income (or EBT) 4,860,000
Less: Taxes (25%) 1,215,000
Earnings after taxes $3,645,000
Less: Preferred stock dividends 100,000
Earnings available to
common shareholders 3,545,000
Less: Common stock dividends 1,458,000
Contribution to retained
earnings $2,087,000 $2,539,250
Given the results of the previous income statement calculations, complete the following statements:
• In Year 2, if Cold Goose has 5,000 shares of preferred stock issued and outstanding, then each preferred share should expect to receivein annual dividends.
• If Cold Goose has 400,000 shares of common stock issued and outstanding, then the firm’s earnings per share (EPS) is expected to change fromin Year 1 toin Year 2.
• Cold Goose’s earnings before interest, taxes, depreciation and amortization (EBITDA) value changed fromin Year 1 toin Year 2.
• It isto 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 becauseof the items reported in the income statement involve payments and receipts of cash.

A. Preferred share= $20 per share in annual dividend

B. The firm’s earnings per share (EPS) is expected to change from 8.8625 in Year 1 to 10.7468 in Year 2

C. EBITDA value changed from $6,000,000 in Year 1 to $7,500,000 in Year 2

D. It is CORRECT to say that Cute Camel’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 $2,087,000 and $2,539,250 repectively . This is because RECONCILIATION of the items that was reported in the income statement involve both payments and the receipts of cash

Explanation:

Preparation of Income statement for the year ending December 31

FIrst step is to prepare the forecasted income statement for Year 2

Cute Camel Woodcraft company

Income statement for the year ending December 31

Year 1 Year 2 (Forecasted)

Net sales$15,000,000 18,750,000

(15,000,000 * 125%=18,750.000)

Less: Operating costs, except depreciation and amortization

9,000,000 11,250,000

(18,750,000 * 60%=11,250,000)

Less: Depreciation and amortization expenses

600,000 600,000

Operating income (or EBIT)

$5,400,000 6,900,000

(15,000,000-9,000,000-600,000=5,400,000)

(18,750,000-11,250,000-600,000=6,900,000)

Less: Interest expense

540,000 1,035,000

(6,900,000 * 15%=1,035,000)

Pre-tax income (or EBT)

4,860,000 5,865,000

($5,400,000 -540,000=4,860,000)

(6,900,000 -1,035,000=5,865,000)

Less: Taxes (25%)

1,215,000 1,466,250

(5,865,000 * 25%=1,466,250)

Earnings after taxes

$3,645,000 4,398,750

(4,860,000 -1,215,000=$3,645,000)

(5,865,000-1,466,250=4,398,750)

Less: Preferred stock dividends

100,000 100,000

Earnings available to common shareholders

3,545,000 4,298,750

($3,645,000-100,000=3,545,000)

( 4,398,750-100,000=4,298,750)

Less: Common stock dividends

1,458,000 1,759,500

Contribution to retained earnings

$2,087,000 $2,539,250

(3,545,000-1,458,000=$2,087,000)

(4,298,750-1,759,500=$2,539,250)

A. In Year 2, each preferred share should expect to receive $20 per share in annual dividend calculated as :

Preferred share= 100,000/5000

Preferred share= $20 per share in annual dividend

B. The firm’s earnings per share (EPS) is expected to change from 8.8625 in Year 1 to 10.7468 in Year 2 Calculated as:

Year 1 earnings per share=3,545,000/400,000 Year 1 earnings per share= 8.8625

Year 2 earnings per share=4,298,750/400,000

Year 2 earnings per share= 10.7468

C. EBITDA value changed from $6,000,000 in Year 1 to $7,500,000 in Year 2 calculated as:

Year 1 (EBITDA)=5,400,000 + 600,000

Year 1 (EBITDA)= $6,000,000

Year 2 (EBITDA)= 6,900,000 + 600,000

Year 2 (EBITDA) = $7500,000

D. It is CORRECT to say that Cute Camel’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 $2,087,000 and $2,539,250repectively . This is because RECONCILIATION of the items that was reported in the income statement involve both payments and the receipts of cash

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