Consider the following scenario: Fuzzy Button Clothing Company’s income statemen
ID: 2728978 • 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____ ($40, $60, $100, $80) 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___ ($10.03, $10.53, $19.50, $17.55) in Year 1 to ____ ($21.36, $12.81, $12.31, $25.13)in Year 2.
•
Fuzzy Button’s before interest, taxes, depreciation and amortization (EBITDA) value changed from____($12,012,000, $9,000,000, $28,800,000, $10,608,000) in Year 1 to____ ($31,375,000, $39,007,500, $11,250,000, $15,175,500) in Year 2.
•
It is___(correct , incorrect) 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 ____(all, all but one) of the item reported in the income statement involve payments and receipts of cash.
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
Year 1 Year 2 (Forecasted) Net sales $30,000,000 $37,500,000 Less: Operating costs, except depreciation and amortization 21,000,000 $26,250,000.0 Less: Depreciation and amortization expenses 1,200,000 1,200,000 Operating income (or EBIT) $7,800,000 $10,050,000.0 Less: Interest expense 780,000 1507500 Pre-tax income (or EBT) $7,020,000 8542500 Less: Taxes (40%) 2,808 ,000 3417000 Earnings after taxes $4,212 ,000 5125500 Less: Preferred stock dividends 200,000 200,000 Earnings available to common shareholders $4,012,000 4925500 Less: Common stock dividends 1,263,600 1537650 Contribution to retained earnings $2,748,400 3387850 Net Cash inflows Particulars Year 1 Year 2 Net sales $30,000,000 $37,500,000 Less: Operating costs, except depreciation and amortization 21,000,000 $26,250,000.0 Less: Interest expense 780,000 1507500 Less: Taxes (40%) 2,808 ,000 3417000 Less: Preferred stock dividends 200,000 200,000 Less: Common stock dividends 1,263,600 1537650 Net Cash inflows $3,948,400 4587850 n Year 2, if Fuzzy Button has 5,000 shares of preferred stock issued and outstanding, then each preferred share should expect to receive$40 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 $10.03 in Year 1 to 12.31 in year 2 Fuzzy Button’s before interest, taxes, depreciation and amortization (EBITDA) value changed from_$9,000,000___($12,012,000, $9,000,000, $28,800,000, $10,608,000) in Year 1 to___$11,250,000_ ($31,375,000, $39,007,500, $11,250,000, $15,175,500) in Year 2. It is incorrect(correct , incorrect) 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 all but one (all, all but one) of the item reported in the income statement involve payments and receipts of cash. (it is cleared from above table showing net inflows that net inflows are not equal to retained earnings, diffrence is equal to amount of Depriciation and amortization which is a non cash items, does not involve receipt and payment)
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.