In November of each year, the CFO of Barker Electronics begins the financial forecasting process to determine the firms projected needs for new financing during the coming year Barker is a small electronics manufacturing company located in Moline, Illinois, a city best known as the home of the John Deere Company The CFO begins the process with the most recent years income statement, then projects sales growth for the coming year, then estimates net income, and finally estimates the additional earnings he can expect to retain and reinvest in the firm The firms income statement for 2016 follows Barker Electronics Income Statement ($ thousands) for the Year Ended December 31, 2016 Sales $1,500 Cost of goods sold (1,050) Gross profit $ 450 Operating costs $ (225) Depreciation expense (50) Net operating income (EBIT) $ 175 Interest expense (10) Earnings before taxes $ 165 Income taxes (58) Net income $ 107 Dividends $ 20 Addition to retained earnings $ 87 The electronics business has been growing rapidly over the past 18 months as the economy recovers, and the CFO estimates that sales will expand by 20 percent in the next year Depreciation expense will equal $50,000, and interest expense is estimated to be $10,000 In addition, he estimates the following relationships next year between each of the income statement expense items and sales COGS sales 70 Operating expenses sales 15 Tax rate 35 Note that for the coming year both depreciation expense and interest expense are projected to remain the same as in 2016 a Estimate Barkers net income for 2017 and its addition to retained earnings under the assumption that the firm leaves its dividends paid at the 2016 level b Reevaluate Barkers net income and addition to retained earnings where sales grow at 40 percent over the coming year (assume dividends are the same as in 2016) This scenario requires the addition of new plant and equipment in the amount of $100,000, which increases annual depreciation to $58,000 per year, and interest expense rises to $15,000

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In November of each year, the CFO of Barker Electronics begins the financial forecasting process to determine the firms projected needs for new financing during

In November of each year, the CFO of Barker Electronics begins the financial forecasting process to determine the firm’s projected needs for new financing during the coming year. Barker is a small electronics manufacturing company located in Moline, Illinois, a city best known as the home of the John Deere Company. The CFO begins the process with the most recent year’s income statement, then projects sales growth for the coming year, then estimates net income, and finally estimates the additional earnings he can expect to retain and reinvest in the firm. The firm’s income statement for 2016 follows: Barker Electronics Income Statement ($ thousands) for the Year Ended December 31, 2016 Sales $1,500 Cost of goods sold (1,050) Gross profit $ 450 Operating costs $ (225) Depreciation expense (50) Net operating income (EBIT) $ 175 Interest expense (10) Earnings before taxes $ 165 Income taxes (58) Net income $ 107 Dividends $ 20 Addition to retained earnings $ 87 The electronics business has been growing rapidly over the past 18 months as the economy recovers, and the CFO estimates that sales will expand by 20 percent in the next year. Depreciation expense will equal $50,000, and interest expense is estimated to be $10,000. In addition, he estimates the following relationships next year between each of the income statement expense items and sales: COGS/sales 70% Operating expenses/sales 15% Tax rate 35% Note that for the coming year both depreciation expense and interest expense are projected to remain the same as in 2016. a. Estimate Barker’s net income for 2017 and its addition to retained earnings under the assumption that the firm leaves its dividends paid at the 2016 level. b. Reevaluate Barker’s net income and addition to retained earnings where sales grow at 40 percent over the coming year (assume dividends are the same as in 2016). This scenario requires the addition of new plant and equipment in the amount of $100,000, which increases annual depreciation to $58,000 per year, and interest expense rises to $15,000.