Question

Cold Goose Metal Works Inc.’s income statement reports data for its first year of operation. The firm’s CEO would like sales to increase by 25% next year.
1. Cold Goose 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 company’s 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 company’s tax rate remains constant at 40% of its pre-tax income or earnings before taxes (EBT).
4. In Year 2, Cold Goose expects to pay $200,000 and $1,537,650 of preferred and common stock dividends, respectively.

Required:
Complete the Year 2 income statement data for Cold Goose.

Answer 1

Answer:

                           Cold Goose Metal Works Inc.

                                  Income Statement

                                              current year                 forecasted

net sales                                $30,000,000              $37,500,000

-operating costs excluding   $21,000,000              $26,250,000

dep. and amortization

-dep. and amortization           $1,200,000                  $1,200,000

EBIT                                         $7,800,000               $10,050,000

-interest expense                      $780,000                  $1,507,500

EBT                                         $7,020,000                  $8,542,500

-income taxes                        $2,808,000                   $3,417,000

net income                              $4,212,000                   $5,125,500

-preferred stock div.                $200,000                     $200,000

earnings available to             $4,012,000                   $4,925,500

common stockholders

-common stock div.                $1,537,650                    $1,537,650

contribution to retained        $2,474,350                    $3,387,850

earnings