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. Cute Camel is able to achieve this level of increased sales, but its interest costs increase from 10% to 15% of earnings before interest
. | 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 companys operating costs (excluding depreciation and amortization) remain at 75% of net sales, and its depreciation and amortization expenses remain constant from year to year. |
3. | The companys 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 $2,084,625 of preferred and common stock dividends, respectively. |
Complete the Year 2 income statement data for Cute Camel, then answer the questions that follow. Be sure to round each dollar value to the nearest whole dollar.
Cute Camel Woodcraft Company | ||
---|---|---|
Income Statement for Year Ending December 31 | ||
Year 1 | Year 2 (Forecasted) | |
Net sales | $30,000,000 |
|
Less: Operating costs, except depreciation and amortization | 22,500,000 |
|
Less: Depreciation and amortization expenses | 1,200,000 | 1,200,000 |
Operating income (or EBIT) | $6,300,000 |
|
Less: Interest expense | 630,000 |
|
Pre-tax income (or EBT) | 5,670,000 |
|
Less: Taxes (25%) | 1,417,500 |
|
Earnings after taxes | $4,252,500 |
|
Less: Preferred stock dividends | 100,000 |
|
Earnings available to common shareholders | 4,152,500 |
|
Less: Common stock dividends | 1,701,000 |
|
Contribution to retained earnings | $2,451,500 | $3,026,937 |
Given the results of the previous income statement calculations, complete the following statements:
In Year 2, if Cute Camel has 5,000 shares of preferred stock issued and outstanding, then each preferred share should expect to receive in annual dividends. | |
If Cute Camel has 400,000 shares of common stock issued and outstanding, then the firms earnings per share (EPS) is expected to change from in Year 1 to in Year 2. | |
Cute Camels earnings before interest, taxes, depreciation and amortization (EBITDA) value changed from in Year 1 to in Year 2. | |
It is to say that Cute Camels net inflows and outflows of cash at the end of Years 1 and 2 are equal to the companys annual contribution to retained earnings, $2,451,500 and $3,026,937, respectively. This is because of the items reported in the income statement involve payments and receipts of cash. |
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