Fuzzy Button Clothing Company\'s income statement reports data for its first yea
ID: 2728740 • Letter: F
Question
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. 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). The company's operating costs (excluding depreciation and amortization) remain at 65% of net sales, and its depreciation and amortization expenses remain constant from year to year. The company's tax rate remains constant at 40% of its pre-tax income or earnings before taxes (EBT). In year 2, Fuzzy Button expects to pay $300,000 and $2,736,788 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.Explanation / Answer
Net sales in the year 1 = $ 30,000,000
As the sales are to be increase by 25% thus new sales in the year 2 = $30,000,000 + ( 25% * 30,000,000 )
= $30,000,000 + $7,500,000 = $37,500,000
As the opearting cost are 65% of net sales thus opeating costs = 65% * $ 37,500,000 = $24,375,000
Income Statement for the year ending December 31
Year 1 Year 2 Net sales $30,000,000 $37,500,000 Less: operating costs excluding depreciation and ammortisation $19,500,000 $24,375,000 Less : depreciation and ammortisation $1,200,000 $1,200,000 Operating income (EBIT) $9,300,000 $11,925,000 less: interest $930,000 $1,788,750(15% of EBIT) Pretax Income or EBT $8,370,000 $10,136,250 Less : taxes (40%) $3,348,000 $4,054,500(40% of EBT) Earnings after taxes $5,022,000 $6,081,750 less: preference stock dividend $300,000 $300,000 Earnings available to common stock holders $4,722,000 $5,781,750 less; common stock dividend $2,259,900 $2,736,788 Contribution to retained earnings $2,462,100 $3,044,962Related Questions
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