Forecasting Net Income In November each year the CFO of Barker Electronics begin
ID: 2760176 • Letter: F
Question
Forecasting Net Income
In November each year the CFO of Barker Electronics begins the financial forecasting process to determine the firms projected needs for new financing during the coming year. Barker is a small electronics manufacturing company located in Illinois which is best known as the hoe of the John Deere Company. The CFO begins the process with the most recent years inocme statement, projects sales growth for the coming year and then estimates net income and finally the addtional earnings he can expect to retain and reinvest in the firm. The firms income statement is as follows:
12/31/2010
Sales $1,500,000
Cost of Goods Sold $1,050,000
Gross Profit $ 450,000
Operating costs $ 225,000
Depreciation Expense $ 50,000
Net Operating Profit $ 175,000
Interest Expense $ 10,000
Earnings Before Taxes $ 165,000
Taxes $ 57,500
NET INCOME $ 107,250
Dividends $ 20,000
Addition to retained earnings $ 87,250
The electronics busines has been growing over the last 18 months as the economy recovers, and the CFO estimtates that hte sales will expand by 20% in the next year. In addition, he estimates the following relationships between each of the income statement expense items and sales:
COGS/Sales 70%
Operating Expense/Sales 15%
Depreciation Expense $50,000
Interest Expense $10,000
Tax Rate 35%
A-Estimate Barkers net income for 2011 and its addition to retained earnings under the assumption that the firm leaves its dividends paid at the 2010 level. What is the estimate of Barkers net income for 2011?
B-Reevaluate Barkers net income in addition to retained earnings where sales grow at 40% over the next year. However, this scenario requires the addition of new plant and equipment in the amount of $100,00, which increases annual depreciation to $58,000 per year, and interest expense rises to $15,000.
Explanation / Answer
A
B
2010 2011 Sales 1500000 1800000 COGS / Sales 70% 1260000 Operating cost/ Sales 15% 270000 Depreciation expense 50000 Interest expenses 10000 Earnings before tax 210000 Taxes 73500 PAT 136500 Dividend 20000 retained Earnings 116500