Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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

Cute Camel Woodcraft Companys income statement reports data for its first year of operation. The firms 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 companys operating costs (excluding depreciation and amortization) remain at 70% of net sales, and its depreciation and amortization expenses remain constant from year to year.
3. The companys tax rate remains constant at 40% of its pre-tax income or earnings before taxes (EBT).
4. In Year 2, Cute Camel expects to pay $100,000 and $1,025,100 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 $15,000,000
$
Less: Operating costs, except depreciation and amortization 10,500,000
Less: Depreciation and amortization expenses 600,000
Operating income (or EBIT) $3,900,000
$
Less: Interest expense 390,000
Pre-tax income (or EBT)3,510,000
Less: Taxes (40%)1,404,000
Earnings after taxes $2,106,000
$
Less: Preferred stock dividends 100,000
Earnings available to common shareholders 2,006,000
Less: Common stock dividends 842,400
Contribution to retained earnings $1,163,600
$
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 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. This is because of the item reported in the income statement involve payments and receipts of

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Income Tax Fundamentals 2013

Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill

31st Edition

1111972516, 978-1285586618, 1285586611, 978-1285613109, 978-1111972516

More Books

Students also viewed these Finance questions

Question

Why is it important to be able to explain an ANNs model structure?

Answered: 1 week ago