Consider the following scenario: Green Caterpillar Garden Supplies Inc.'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. Green Caterpillar 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 80% 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, Green Caterpillar expects to pay $300,000 and $602,438 of preferred and common stock dividends, respectively. Complete the Year 2 income statement data for Green Caterpillar, then answer the questions that follow. Be sure to round each dollar value to the nearest whole dollar. Year 2 (Forecasted) $ 400,000 Green Caterpillar Garden Supplies Inc. Income Statement for Year Ending December 31 Year 1 $10,000,000 8,000,000 400,000 $1,600,000 160,000 1,440,000 360,000 $1,080,000 300,000 Net sales Less: Operating costs, except depreciation and amortization Less: Depreciation and amortization expenses Operating income (or EBIT) Less: Interest expense Pre-tax income (or EBT) Less: Taxes (25%) Earnings after taxes Less: Preferred stock dividends Earnings available to common shareholders Less: Common stock dividends Contribution to retained earnings $ 780,000 486,000 $294,000 $436,312 Green Caterpillar Garden Supplies Inc. Income Statement for Year Ending December 31 Year 1 Year 2 (Forecasted) $ Net sales Less: Operating costs, except depreciation and amortization $10,000,000 8,000,000 400,000 $1,600,000 160,000 Less: Depreciation and amortization expenses Operating income (or EBIT) Less: Interest expense Pre-tax income (or EBT) 400,000 $ 1,440,000 Less: Taxes (25%) 360,000 $ $1,080,000 300,000 Earnings after taxes Less: Preferred stock dividends Earnings available to common shareholders Less: Common stock dividends Contribution to retained earnings 780,000 486,000 $294,000 $436,312 Given the results of the previous income statement calculations, complete the following statements: In Year 2, if Green Caterpillar has 25,000 shares of preferred stock issued and outstanding, then each preferred share should expect to receive in annual dividends. If Green Caterpillar has 200,000 shares of common stock issued and outstanding, then the firm's earnings per share (EPS) is expected to change from in Year 1 to in Year 2 Green Caterpillar's earnings before interest, taxes, depreciation and amortization (EBITDA) value changed from in Year 1 to in Year 2. . It is to say that Green Caterpillar'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, $294,000 and $436,312, respectively. This is because of the items reported in the income statement involve payments and receipts of cash
