Illinois State University : FIL 2-x y MindTap-Cengage Learning Niko × ::: Apps S

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Illinois State University : FIL 2-x y MindTap-Cengage Learning Niko × ::: Apps Secure https://ng.cengage.com/static/nb/ui/evo/index.html?deploymentid:5832842893131693765211663378eISBN-9781337395298&id=366782374&snap.., Illinois State Univer... N etflix Hulu J SHOWTIME YouTube MINDTAP Search this course Niko From Cengage Ch 03: Assignment - Financial Statements, Cash Flow, and Taxes Green Caterpillar Garden Supplies Inc.'s income statement reports data for its first year of operation. The firm's CEO would like sales to increase by 25% next year 1, Green Caterpillar 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 70% 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, Green Caterpillar expects to pay $150,000 and $1,067,813 of preferred and common stock dividends, respectively Complete the Year 2 income statement data for Green Caterpillar, then answer the questions that follow. Be sure to round each dollar value to the nearest whole dollar Green Caterpillar Garden Supplies Inc. Income Statement for Year Ending December 31 Year 2 Year 1 (Forecasted) Net sales $25,000,000 17,500,000 1,000,000 $6,500,000 650,000 5,850,000 2,340,000 $3,510,000 150,000 Less: Operating costs, except depreciation and amortization Less: Depreciation and amortization expenses 1,000,000 Operating income (or EBIT) Less: Interest expense Pre-tax income (or EBT) Less: Taxes (40%) Earnings after taxes Less: Preferred stock dividends Earninas available to common shareholders

Explanation / Answer

Answer :- working notes :

1. Calculation of net sales

As given in the question that Net sales will be increased by 25% in next year

So, net sales will be in year 2 :- 25,000,000$ (1+25%)

Forecasted sale in 2nd year will be 31,25,00,00$

2. Calculation of operating cost

As given in the question, operating cost shall remain same except depreciation @ 70% of net sale

So, in year 2, operating cost will be 31,25,00,00 * 70%

Operating cost except depreciation in year 2 will be 21,87,50,00$

Year 2   :-

Net sales = 31,25,00,00$

Less : operating cost except depreciation = 21,87,50,00 $

Less : Depreciation & amortization expense= 1,000,000 $

EBIT : = 83,75,000 $

Less : Interest Expense (15% of EBIT) = 12,56,250 $

EBT : = 71,18,750 $

Less : Tax @ 40% = 28,47,500 $

Earning after taxes = 42,71,250 $

Less : preferred stock dividend = 1,50,000 $

Earning available for common shareholders= 41,21,250$

Less : common stock dividend = 10,67,813 $

Contribution to retained earning = 30,53,437 $

a) If green caterpillar has 10,000 shares of preferred stock issued & outstanding then each preferred share should expect receive 1,50,000$/10,000 = 15 $ dividend per share

Formula used :

preferred stock dividend / no. Of preferred stock

b)

If Green caterpillar has 2,00,000 shares of common stock issued & outstanding, then the firm's earning per share (EPS) is expected to change from 16.8$ in year 1 to 20.60 $ in year 2

c)

Green caterpillar's earning before interest, taxes, depreciation & amortization value change from 75,00,000 $ in year 1 to 93,75,000 $ in year 2

d) correct, fixed percentage & non cash

Year 1 ($) year 2 ($) 1. Earning available for common shareholders 33,60,000 41,21,250 2. No. Of shares of common shareholders issued & outstanding 2,00,000 2,00,000 EPS (1/2) 16.8 20.60

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