$4.$ Income statement

The income statement, also known as the profit and loss statement, helps calculate the firm$$s net income that is available to shareholders. The income statement is usually prepared using the International Financial Reporting Standards $($IFRS$),$ which match revenues and expenses to the period in which they were incurred, not necessarily when cash was received or paid.

The following is the income statement of Water and Power Co$.$ in its first year of operation:

Water and Power Co$.$ Income Statement for the Year Ending on December $31($Millions of dollars$)$

Year $1$

Net sales $$3,500$

Operating costs, except depreciation $2,800$

Depreciation $140$

Total operating costs $2,940$

Operating income $($or EBIT$)560$

Less: Interest $56$

Earnings before taxes $($EBT$)504$

Less: Taxes $(40\%)202$

Net income available to shareholders $302$

The firm$$s CEO would like sales to increase by $25\%$ next year. Assume that $(1)$ the operating costs $($excluding depreciation$)$ remain at $80\%$ of sales, $(2)$ depreciation remains at $4\%$ of sales, and $(3)$ the interest cost increases from $10\%$ to $15\%$ of earnings before interest and taxes $($EBIT$).$ The tax rate of $40\%$ also remains the same.

What will be the company$$s operating income in the second year?

According to the income statement given, Water and Power Co$.$s earnings before interest, taxes, depreciation, and amortization $($EBITDA$)$ was $$700$ million in the first year. Suppose the government considers a provision that will require firms to depreciate their assets over a longer period of time. This provision will decrease the firm$$s annual depreciation expense but will have no effect on its sales revenue or tax rates. If the provision passes, which of the following statements will be correct? Check all that apply.

Water and Power Co$.$s EBITDA will remain unchanged.

Water and Power Co$.$ will have a higher net income.

Water and Power Co$.$s operating income will decrease.

Water and Power Co$.$s operating income will increase.

Water and Power Co$.$ will have a lower net income.

Water and Power Co$.$ had $25$ million shares of common stock outstanding in both years. What will be the firm$$s earnings per share $($EPS$)$ in the second year?

$$28\mathrm{.}00$

$$147\mathrm{.}00$

$$23\mathrm{.}80$

$$14\mathrm{.}28$