• The accounting department of Nandos Co. has issued a forecast of the companys income statement, as per below:

Sales	$ 14,000
Operating costs	$ (6,800)
EBITDA	$ 7,200
Depreciation & Amortization	$ (1,800)
EBIT	$ 5,400
Interest expense	$ (1,400)
EBT	$ 4,000
Income taxes	$ (800)
Net profit	$ 3,200

• At the companys recent meeting, its CEO Mr Croydon Dias has announced to the firms divisional managers that he would like to see an increase in Nandos revenue.
• In addition, Mr Dias has established a TARGET net profit of $10,000 under the 20% corporate tax rate.
• As the companys CFO, you have calculated that Nandos operating costs make up 50% of the firms revenues.
• Given the change in the accounting standards, the Nandos depreciation and amortization expense will decrease by 7.5%.
• In addition, due to the recent change in monetary policy set by the government, you are expecting an increase in the firms interest expense by 15%.
• The taxation office has confirmed that there will be no changes in the applicable corporate tax rate.

1. Determine the level of revenue Nandos has to generate in order to achieve the net profit target set by Mr Dias by constructing the companys TARGET income statement below. (4 points)

Sales
Operating costs
EBITDA
Depreciation & Amortization
EBIT
Interest expense
EBT
Income taxes
Net profit

2. Discuss whether you agree with the statement: When firms issue debt, it reduces their financial strength and flexibility.

Explain the impact it has on the relevant financial statements. (1 point)