Austin Grocers recently reported the following 2005 incomestatement (in millions

Question

Austin Grocers recently reported the following 2005 incomestatement (in millions of dollars):

Sales                                                                                                    $700

Operating costs including depreciation            500

EBIT                                                                                                    $200

Interest                  40

EBT                                                                                                       160

Taxes (40%)                  64

Net Income                    $96

Dividends                     $32

Addition to retained earnings               $64

This year the company is forecasting a 25 percent increase insales, and it expects that its year-end operating costs includingdepreciation will equal 70 percent of sales. Austin’s taxrate, interest expense, and dividend payout ratio are all expectedto remain constant.

a.     What is Austin’s projected 2006net income?

b.     What is the expected growth rate inAustin’s dividends?

Explanation / Answer

Projected Income Statement forthe year 2006

Projected Income Statement forthe year 2006

Sales $875,000,000.00 ($700 M * 25%) Operating Cost including depreciation ($612,500,000.00) (Operatinc Cost & Dep will equl to 70% ofSales) EBIT $262,500,000.00 Interest ($40,000,000.00) EBT $222,500,000.00 Income Tax (40%) ($89,000,000.00) Net Income $133,500,000.00

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