Blue Hamster Manufacturing Inc.?s income statement reports data for its first ye
ID: 2383308 • Letter: B
Question
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 25v/o next year. 1. 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). 2. The company?s operating costs (excluding depreciation and amortization) remain at 80% 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 $100,000 and $642,600 of preferred and common stock dividends, respectively.Explanation / Answer
Ans
Details Details Year 1 Calcuation Year 2 (Forecasted) Net Sales 25 % increase from Base yaer 150,00,000.00 15000000*125/100 187,50,000.00 Less Operating cost 80% of sales 120,00,000.00 12000000/15000000*18750000 150,00,000.00 Less Depreciation and Amortisation Same 6,00,000.00 60000*1 6,00,000.00 Operating Income 24,00,000.00 31,50,000.00 Less: interest Expense Increase from 10% of EBIT to 15% 2,40,000.00 .15*3150000 4,72,500.00 Pre Tax Income 21,60,000.00 26,77,500.00 Less: Taxes 40% 8,64,000.00 .40*1071000 10,71,000.00 Earnings After Taxes 12,96,000.00 16,06,500.00 Less:Preferred stock Dividend 1,00,000.00 1,00,000.00 Earnings available to common stock holders 11,96,000.00 15,06,500.00 Less: Common stock dividend 5,18,400.00 6,42,600.00 Contribution to retained earnings 6,77,600.00 8,63,900.00