The income statement, also known as the profit and loss (P&L;) statement, provid

Question

The income statement, also known as the profit and loss (P&L;) statement, provides a snapshot of the financial performance of a company during a specified period of time. It reports a firm's gross income, expenses, net income, and the income that is available for distribution to its preferred and common shareholders. The income statement is prepared using the generally accepted accounting principles (GAAP) that match the firm's revenues and expenses to the period in which they were incurred, not necessarily when cash was received or paid. Investors and analysts use the information given in the income statement and other financial statements and reports to evaluate the company's financial performance and condition. Consider the following scenario: Blue Hamster Manufacturing Inc.'s income statement reports data for its first year of operation. The firm's CEO would like sales to increase by 25% next year. Blue Hamster 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 1, 2. The company's operating costs (excluding depreciation and amortization) remain at 75% 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, Blue Hamster expects to pay $300,000 and $1,876,163 of preferred and common stock dividends, respectively. Complete the Year 2 income statement data for Blue Hamster, then answer the questions that follow. Be sure to round each dollar value to the nearest whole dollar

Explanation / Answer

First, we should prepare Income statement for Year 2 -

Less: Operating Costs

Year 1 EPS = $3,102,000 / 200,000 = $15.51 per share

Year 2 EPS = $3,869,250 / 200,000 = $19.35 per share

Year 1 EBITDA = $6,300,000 + $1,200,000 = $7,500,000

Year 2 EBITDA = $8,175,000 + $1,200,000 = $9,375,000

Income Statement - Year 2 Particulars Amount($) Sales 30,000,000 + 25% x 30,000,000 = 37,500,000

Less: Operating Costs

37,500,000 x 75% = 28,125,000 Less: Depreciation and Amortization 1,200,000 Operating Profit (EBIT) 8,175,000 Less: Interest Expense @ 15% 8,175,000 x 15% = 1,226,250 Pre Tax Income (EBT) 6,948,750 Less: Tax @ 40% 2,779,500 Earnings after taxes 4,169,250 Less: Preferred Stock Dividends 300,000 Earnings available to common stockholders 3,869,250 Less: Common Stock dividends 1,876,163 Contribution to Retained Earnings 1,993,087

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