November of each year, the CFO of Barker Electronics begins the financial foreca

Question

November of each year, the CFO of Barker Electronics begins the financial forecasting process to determine the firm's Ejected needs for new financing during the coming year. Barter is a small electronics manufacturing company located in Moline. Illinois, a city best known as the home of the John Deere Company. The CFO begins the process with the most recent year's income statement, then projects sales growth for the coming year, then estimates net income, and finally then esti­mates (he additional earnings he can expect to retain and recent in the firm. The firm's income statement for 2011 follows: The electronics business has been growing rapidly over the past 1S months as the economy recovers, and the CFO estimates that sales will expand by 20 percent in the next year. Depreciation expense will equal dollar 50, 000 and interest expense is estimated to be dollar 10, 000. In addition, he estimates the following relationships next year between each of the income statement expense items and sales: COGS/sales 70percentage Operating expenses/sales 15 percentage Tax rate 35 percentage Note that for the coming year both depreciation expense and in­terest expense arc projected to remain the same as in 2011. Estimate Barker's net income for 2012 and its addition to retained earnings under the assumption that the firm leaves its dividends paid at the 2011 level. Reevaluate Barker's net income and addition to retained earnings where sales grow at 40 percent over the coming year. This scenario requires the addition of new plant and equipment in the amount of dollar 100, 000, which increases annual depreciation to dollar 58,000 per year, and interest expense rises to dollar 15,000.

Explanation / Answer

a.

b.Re-evaluation of Income:

Income Statement ($'000) Year Ended Dec 31, 2012 Sales 1500 * 1.20 $1800 COGS 1800 * 70% 1260 Gross Profit 540 Operating Costs 270 Depreciation expense 50 Net Operating Profit 220 Interest Expense 10 Earnings before taxes 210 taxes @35% 73.50 Net Income 136.50 Dividends $20 addition to retained earnings $116.50

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