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Fuzzy Button Clothing Companys income statement reports data for its first year of operation. The firms CEO would like sales to increase by 25% next
Fuzzy Button Clothing Companys income statement reports data for its first year of operation. The firms CEO would like sales to increase by 25% next year.
1. | Fuzzy Button 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 40% of its pre-tax income or earnings before taxes (EBT). |
4. | In Year 2, Fuzzy Button expects to pay $150,000 and $1,042,313 of preferred and common stock dividends, respectively. |
Complete the Year 2 income statement data for Fuzzy Button, then answer the questions that follow. Be sure to round each dollar value to the nearest whole dollar.
Fuzzy Button Clothing CompanyIncome 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 (40%) | 2,268,000 |
|
Earnings after taxes | $3,402,000 |
|
Less: Preferred stock dividends | 150,000 |
|
Earnings available to common shareholders | $3,252,000 |
|
Less: Common stock dividends | 850,500 |
|
Contribution to retained earnings | $2,401,500 | $2,976,937 |
Given the results of the previous income statement calculations, complete the following statements:
In Year 2, if Fuzzy Button has 10,000 shares of preferred stock issued and outstanding, then each preferred share should expect to receive______ in annual dividends. | |
If Fuzzy Button has 200,000 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. | |
Fuzzy Buttons before interest, taxes, depreciation and amortization (EBITDA) value changed from _______ in Year 1 to ______ in Year 2. | |
It is ________(T/F) to say that Fuzzy Buttons net inflows and outflows of cash at the end of Years 1 and 2 are equal to the companys annual contribution to retained earnings, $2,401,500 and $2,976,937, respectively. This is because _____ (all or all but one) of the items reported in the income statement involve payments and receipts of cash. |
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