Problem 14-10 (similar to) Question Help (Forecasting net income) In November of
ID: 2621121 • Letter: P
Question
Problem 14-10 (similar to) Question Help (Forecasting net income) In November of each year, the CFO of Barker Electronics begins the financial forecasting process to determine the firm's projected needs for new financing during the coming year. Barker is a small electronics manufacturing company located in Moline, llinois, which is best known as the home of the John Deere Company. The CFO begins the process with the most recent years income statement, projects sales growth for the coming year, and then estimates net income and finally the additional earnings he can expect to retain and reinvest in the firm. The firm's income statement for 2015 follows: EB The electronics business has been growing rapidly over the past 18 months as the economy recovers, and the CFO estimates that sales will expand by 24 percent in the next year. In addition, he estimates the following relationships between each of the income statement expense items and sales:?. Note that for the coming year both depreciation expense and interest expense are projected to remain the same as in 2015. a. Estimate Barker's net income for 2016 and its addition to retained eamings under the assumption that the firm leaves its dividends paid at the 2015 level. b. Reevaluate Barkers net income and addition to retained eamings if sales grow at 48 percent over the coming year. However, this scenario requires the addition of new plant and equipment in the amount of $110,000, which increases annual depreciation to $50,000 per year, and interest expense rises to $16,000 a. What is the estimate of Barker's net income for 2016? s? (Round to the nearest dollar.) Data Table COGS/sales Operating expenses/sales Depreciation expense Interest expense Tax rate (Click on the icon located on the top-right corner of the data table above in order to copy its contents into a 65% ? 10% $44,000 $12,000 35% Enter your Clear All Check Answer Print DoneExplanation / Answer
14-10
a. Sales for 2016 = 1,400,000*(1+24%)
= $1,736,000
Net income estimation for 2016 is provided below:
b. Sales = (1+48%)*1,400,000 = $2,072,000
2nd question:
D0 = 1.32
R = 11% and g = 7%
Thus D1 = D0*(1+g) = 1.32*(1+7%) = $1.4124
Thus price = D1/(r-g)
= 1.4124/(11%-7%)
= $35.31
Sales 1,736,000.00 Cost of goods sold (65% of sales) 1,128,400.00 Gross profit 607,600.00 Operating costs (10% of sales) 173,600.00 Depreciation expense 44,000.00 Net operating profit 129,600.00 Interest expense 12,000.00 Earnings before tax 117,600.00 Tax (35%) 41,160.00 Net income 76,440.00 Dividends 30,000.00 Addition to retained earnings 46,440.00