Consider the following scenario: Fuzzy Button Clothing Company’s income statemen
ID: 2491831 • Letter: C
Question
Consider the following scenario:
Fuzzy Button Clothing Company’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.
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 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, Fuzzy Button expects to pay $200,000 and $,1537,650 of preferred and common stock dividends, respectively.
Complete the Year 2 income statement data for Fuzzy Button, then answer the questions that follow. Round each dollar value to the nearest whole dollar.
Fuzzy Button Clothing Company
Income Statement for Year Ending December 31
Year 1
Year 2 (Forecasted)
Net sales
$30,000,000
Less: Operating costs, except depreciation and amortization
21,000,000
Less: Depreciation and amortization expenses
1,200,000
1,200,000
Operating income (or EBIT)
$7,800,000
Less: Interest expense
780,000
Pre-tax income (or EBT)
$7,020,000
Less: Taxes (40%)
2,808 ,000
Earnings after taxes
$4,212 ,000
Less: Preferred stock dividends
200,000
Earnings available to common shareholders
$4,012,000
Less: Common stock dividends
1,263,600
Contribution to retained earnings
$2,748,400
$3,387,850
Given the results of the previous income statement calculations, complete the following statements:
•
In Year 2, if Fuzzy Button has 5,000 shares of preferred stock issued and outstanding, then each preferred share should expect to receive____ in annual dividends.
•
If Fuzzy Button has 400,000 shares of common stock issued and outstanding, then the firm’s earnings per share (EPS) is expected to change from___ in Year 1 to ____ in Year 2.
•
Fuzzy Button’s before interest, taxes, depreciation and amortization (EBITDA) value changed from____ in Year 1 to____ in Year 2.
•
It is to say that Fuzzy Button’s net inflows and outflows of cash at the end of Years 1 and 2 are equal to the company’s annual contribution to retained earnings, $2,748,400 and $3,387,850 , respectively. This is because of the item reported in the income statement involve payments and receipts of cash.
*NEED ALL PARTS ANSWERED*
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 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, Fuzzy Button expects to pay $200,000 and $,1537,650 of preferred and common stock dividends, respectively.
Explanation / Answer
Answer a. Fuzzy Button Clothing Company Income Statement for Year Ending December 31 Year 1 Year 2 (Forecasted) Net sales 30,000,000 37,500,000 (30,000,000 X 1.25 ) Less: Operating costs, except depreciation and amortization 21,000,000 26,250,000 (37,500,000 X 70%) Less: Depreciation and amortization expenses 1,200,000 1,200,000 Operating income (or EBIT) 7,800,000 10,050,000 (8,542,500 / 85%) Less: Interest expense 780,000 1,507,500 (10,050,000 X 15%) Pre-tax income (or EBT) 7,020,000 8,542,500 (5,125,500 / 60%) Less: Taxes (40%) 2,808,000 3,417,000 (8,542,500 X 40%) Earnings after taxes 4,212,000 5,125,500 4,925,500 + 200,000) Less: Preferred stock dividends 200,000 200,000 Earnings available to common shareholders 4,012,000 4,925,500 (3,387,850 + 1,537,650) Less: Common stock dividends 1,263,600 1,537,650 Contribution to retained earnings 2,748,400 3,387,850 Answer b. In Year 2, if Fuzzy Button has 5,000 shares of preferred stock issued and outstanding, then each preferred share should expect to receive $40 ($200,000 / 5000 Shares) in annual dividends. Answer c. If Fuzzy Button has 400,000 shares of common stock issued and outstanding, then the firm’s earnings per share (EPS) is expected to change from $10.03 (4,012,000 / 400,000 Shares) in Year 1 to $12.31 (4,925,500 / 400,000) in Year 2 Answer d. Fuzzy Button’s before interest, taxes, depreciation and amortization (EBITDA) value changed from $9,000,000 in Year 1 to $11,250,000 in Year 2. Answer e. The income staement also includes the Amortization and Depreciation expense that does not involve the payment of Tax. The net cash inflow and cash ouflow equal to company's annual contribution to retained earnings may be due to some cash Inflow or outflow due to Investing & Financing activities.
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