Question

PRO FORMA INCOME STATEMENT Austin Grocers recently reported the following 2016 income statement (in millions of dollars): Sales $700 Operating costs including depreciation 500 EBIT $200 Interest 40 EBT $160 Taxes (40%) 64 Net income $96 Dividends $32 Addition to retained earnings $64 For the coming year, the company is forecasting a 15% increase in sales, and it expects that its year-end operating costs, including depreciation, will equal 60% of sales. Austin's tax rate, interest expense, and dividend payout ratio are all expected to remain constant. What is Austin's projected 2017 net income? What is the expected growth rate in Austin's dividends?

Answer 1

Net income = $169.2

Growth in dividend = 76.25%

Step-by-step explanation:

The projected figures are as below:

Sales = $700 x (1 + 15%) = $805 (15% increase in sales)

Operating costs including depreciation = $805 x 60% = $483 (60% of sales)

Interest expense = 40 (remain constant)

EBIT = Sales - Operating costs including depreciation = $805 - $483 = $322

EBT = EBIT - Interest expense = $322 - $40 = $282

Net income = EBT x (1 - Tax rate) = $282 x (1 - 40$) = $169.2

Dividend = Net income x Dividend payout ratio = $169.2 x (32/96) = $56.4

Growth in dividend = $56.4/$32 = 76.25%