P11-36. Sensitivity Analysis of Forecasted Income Statement Following is the income statement for First Solar Inc. for the year ended December 31, 2015. LO FI Consolidated Statements of Operations 12 Months Ended $ thousands Dec. 31, 2015 Dec. 31, 2014 Dec. 31, 2013 Net sales... $3,578,995 $3,391,187 $3,309,616 Cost of sales. 2,659,728 2,566,246 2,444,984 Gross profit. 919,267 824,941 864,632 Operating expenses Research and development 130,593 143,969 134,300 Selling, general, and administrative. 255,192 253,827 270,261 Production start-up ..... 16,818 5,146 2,768 Restructuring and asset impairments 86,896 Total operating expenses. 402,603 402,942 494,225 Operating income. 516,664 421,999 370,407 Foreign currency (loss) gain, net (6,868) (1,461) 893 Interest income.. 22,516 18,030 16,752 Interest expense, net (6,975) (1,982) (1,884) Other expense, net. (5,502) (4,485) (5,189) Income before taxes and equity in earnings of unconsolidated affiliates 519,835 432,101 380,979 Income tax benefit (expense).... 6,156 (31,188) (30,098) Equity in earnings (loss) of unconsolidated affiliates, net of tax 20,430 (4.949) (163) Net income. $ 546,421 $ 395,964 $ 350,718 Required a. Compute the effective tax rate for First Solar for each of the three years presented (to four decimal places such as 0.1234 or 12.34%). What do we observe? What might explain this rate? b. Use the following assumptions to forecast the FY2016 income statement. Net sales growth. Cost of sales. Research and development. Selling, general, and administrative Production startup.. Restructuring and asset impairments Foreign currency (loss) gain, net Interest income, interest expense, and other expense Income tax benefit (expense).. Equity in earnings (loss) of unconsolidated affiliates, net of tax.... 6% 74.0% of net sales 3.6% of net sales 7.1% of net sales 0.5% of net sales $0 $0 No change in $ Effective rate for 2015 Increase by 10% over FY2015 c. Compute the percent change in net income from actual FY2015 to the FY2016 forecasted net income. d. Perform a sensitivity analysis by changing the effective tax rate and seeing the change in net income. Instead of using the FY2015 effective tax rate, use the average effective tax rate that prevailed over the 2013 and 2014 period. Again, compute the tax rate to four decimal places. Compute the percent change in net income from actual FY2015 to the FY2016 forecasted net income. How sensitive is net income to the change in tax rate? e. Perform a sensitivity analysis by changing the growth rate for net sales. Forecast the income statement for a range of growth rates, from 5% to 7% in 50-basis-point increments (i.e. 5%, 5.5%, 6%, 6.5%, and 7%). For this part, use an effective tax rate of 7.56%. f. Perform a sensitivity analysis by changing the cost of sales percent to determine the effect on net in- come (not the entire income statement, only net income). Vary the cost of sales percent up and down by 50 basis points from 74%. For this part, use an effective tax rate of 7.56% and include the entire range of sales growth rates from 5% to 7%. That is, generate a table that shows net income for three cost-of-sales percentages and five sales-growth rates. For each cell, compute the percent change in net income from actual FY2015 to the FY2016 forecasted net income
