Income Statement 1.) Pearson Brothers recently reported an EBITDA of $9.5 millio
ID: 2646232 • Letter: I
Question
Income Statement
1.) Pearson Brothers recently reported an EBITDA of $9.5 million and net income of $2.1 million. It had $2.0 million of interest expense, and its corporate tax rate was 40%. What was its charge for depreciation and amortization? Write out your answer completely. For example, 25 million should be entered as 25,000,000. Round your answer to the nearest dollar, if necessary.
2.) Hermann Industries is forecasting the following income statement:
The CEO would like to see higher sales and a forecasted net income of $1,890,000. Assume that operating costs (excluding depreciation and amortization) are 55% of sales and that depreciation and amortization and interest expenses will increase by 6%. The tax rate, which is 40%, will remain the same. What level of sales would generate $1,890,000 in net income? If necessary, round your answer to the nearest dollar at the end of the calculations.
Debt to Capital Ratio
3.) Bartley Barstools has a market/book ratio equal to 1. Its stock price is $16 per share and it has 4.9 million shares outstanding. The firm
Sales $6,000,000 Operating costs excluding depreciation & amortization 3,300,000 EBITDA $2,700,000 Depreciation and amortization 480,000 EBIT $2,220,000 Interest 420,000 EBT $1,800,000 Taxes (40%) 720,000 Net income $1,080,000Explanation / Answer
Solution -
1.) Charge for depreciation and amortization -
Here we know that EBITDA - D&A - I = Profit Before Taxes (PBT)
Then we reduce Taxes from PBT as per Tax rates to arrive at the Net profit
Here we have all other figures except Depreciation & Amortization so we can calculate it using the below formula -
Net Profit = ( EBITDA - Interest Expenses- Depreciation ) - 0.40 ( EBITDA - Interest Expenses- Depreciation )
2100000 = (9500000 - 2000000 - X ) - 0.40 (9500000 - 2000000 - X)
2100000 = (7500000 - X ) - 0.40 (7500000 - X)
2100000 = (7500000 - X ) - 3000000 + 0.40X
2100000 = 7500000 - 3000000 - X + 0.40X
2100000 = 4500000 - 0.60X
0.60X = 4500000 - 2100000
0.60X = 2400000
:- X = $ 4000000
Thus we have depreciation and amortization of $ 4000000
2) Level of sales that would generate $1,890,000 in net income - Similar to above problem this one has all the figures except Sales so below is the summarize data of what we have and what we need to find
Net Profit = ( EBITDA - Interest Expenses- Depreciation ) - 0.40 ( EBITDA - Interest Expenses- Depreciation )
1890000 = ( 0.45X - 445200 - 508800 ) - 0.40 ( 0.45X - 445200 - 508800 )
1890000 = ( 0.45X - 954000 ) - 0.40 ( 0.45X - 954000 )
1890000 = ( 0.45X - 954000 ) - 0.18X +381600
1890000 = ( 0.45X - 0.18X +381600 - 954000
1890000 = 0.27X - 572400
1890000 + 572400 = 0.27X
2462400= 0.27X
;- X = 9120000 Thus we have Sales as $ 9120000
3.) Debt-to-capital ratio - Here we will have to find what the Debt is within the Capital structure of the firm
Total capital is $135 million
Stock price is $16 per share (market/book ratio equal to 1)
shares outstanding is 4.9 million
So Share Capital = 4.9 X 16 = 78.4 million so rest ie 135 million - 78.4 million = 56.6 Million is Debt
So we have Debt-to-capital ratio = Debt / Total Capital = 56600000 / 135000000 = 0.4192 :1 or 41.92 %
4)
a) profit margin on sales - to calculate we have the below details
Profit Margin = Net Income/Sales= 0.04/1.5= .0266 or 2.66 %
b. debt-to-assets ratio - To calculate this we need debt to be calculated first
we have Asset = Equity + Debt -----(1)
Now after considering
we have Asset/Equity = 14/4 means asset is 14 : 4 against Debt and
Asset = Equity + Debt so Debt/Asset = 10/14 = 5/7 = 71.42%
Current Forecast Revised Forecast Comment Sales $6,000,000 X Operating costs excluding depreciation & amortization 33,00,000 .55 X OpEx EBITDA $2,700,000 .45X X-0.55X Depreciation and amortization 4,80,000 508800 6% Increase EBIT $2,220,000 Interest 4,20,000 445200 6% Increase EBT $1,800,000 Taxes (40%) 7,20,000 Net income $1,080,000 1890000 Expected