Meadow Industries is forecasting the following income statement: $15,500,000 Sal
ID: 2615648 • Letter: M
Question
Meadow Industries is forecasting the following income statement: $15,500,000 Sales Operating costs excluding depreciation EBITDA Depreciation EBIT Interest EBT Taxes (30%) Net income 8.525.000 $ 6,975,000 2.000.000 $ 4,975,000 2.500.000 $ 2,475,000 42.500 S 1,732.500 The CEO would like to see higher sales and a forecasted net income of S3 500,000. Assume that operating costs excluding depreciation) are 55% of sales and that depreciation and interest expenses will increase by 20%. The x rate will remain at 30% w hat level of sales would generate S3,500,000 in net income? a. $28,253,968 b. $23,299,775 c.$17,267,500 d. $23,111,111 e $18,167,500Explanation / Answer
Answer:
Projected Net Income = $3,500,000
Projected Net Income = Projected EBT * (1 – Tax Rate)
$3,500,000 = Projected EBT * (1 – 0.30)
Projected EBT = $5,000,000
Expected Interest Expense = $2,500,000 * 1.20 = $3,000,000
Expected Depreciation Expense = $2,000,000 * 1.20 = $2,400,000
EBT = EBITDA – Depreciation – Interest
$5,000,000 = Expected EBITDA - $2,400,000 - $3,000,000
Expected EBITDA = $10,400,000
Sales – Operating Cost excluding Depreciation = EBITDA
Let the Expected Sales be “$x”
$10,400,000 = $x – ($x* 0.55)
$10,400,000 = $x - $0.55x
$10,400,000 = $0.45x
x = $23,111,111
At Sales of $23,111,111 , Meadow Industries would be able to generate Net Income of $3,500,000.