Student Name SAMPLE MIDTERM 1: PRINCIPALS OF FINANCIAL MANAGEMENT Question 3: Pl

ID: 2818033 • Letter: S

Question

Student Name SAMPLE MIDTERM 1: PRINCIPALS OF FINANCIAL MANAGEMENT Question 3: Please complete the second column (2019 forecast) in the table below: In 2019 . Lohia would like to increase sales by 10%. COGs increases to 85% of sales. Other expenses and depreciation remain the same. Interest costs increase from 10% to 12%. Lohia's corporate tax is 40%. Is this a good strategy? 2019 (forecast) 2018 2017 Sales COGS Other expenses $7,035,600 $6,034,000 5,528,000 519,988 (13,988) 116,960 (130,948) 136,012 (266,960) (106,784) (160,176) 6,528,265,875,992 550,000 609,608 116,960 492,648 70,008 422,640 169,056 253,584 EBITDA Depreciation &Amortization1169 939 EBIT Interest Expenses EBT Taxes Net income

Explanation / Answer

2019 (forecast)

Sales

$ 7,739,160.00

COGS

$ 6,578,286.00

Other expenses

$ 550,000.00

EBITDA

$ 610,874.00

Depreciation & Amortization

$ 116,960.00

EBIT

$ 493,914.00

Interest expense

$ 84,009.60

EBT

$ 409,904.40

Taxes

$ 163,961.76

Net Income

$ 245,942.64

Explanation:

Sales = $ 7,035,600 x 1.1 = $ 7,739,160

COGS = $ 7,739,160 x 0.85 = $ 6,578,286.00

EBITDA = Sales – COGS – Other expenses = $ 7,739,160 - $ 6,578,286 - $ 550,000 = $ 610,874

EBIT = EBITDA - Depreciation & Amortization = $ 610,874 - $ 116,960 = $ 493,914

Interest expense = ($ 70,008/0.1) x 0.12 = $ 700,080 x 0.12 = $ 84,009.60

[Last year interest was 10 %, so total debt is $ 700,080 and this year interest is 12 % of debt]

EBT = EBIT - Interest expense = $ 493,914 - $ 84,009.60 = $ 409,904.40

Taxes = EBT x 40 % = $ 409,904.40 x 0.4 = $ 163,961.76

Net Income = EBT – Taxes = $ 409,904.40 - $ 163,961.76 = $ 245,942.64

Sales increased but net income has decreased in 2019 forecast as compared to 2018. So the strategy does not seem to be a good one.