Question

Blue Hamster Manufacturing Inc.Income Statement for Year Ending December 31

Year 1 Year 2 (Forecasted)
Net sales $15,000,000
Less: Operating costs, except depreciation and amortization 12,000,000
Less: Depreciation and amortization expenses 600,000 600,000
Operating income (or EBIT) $2,400,000 $
Less: Interest expense 240,000
Pre-tax income (or EBT) $2,160,000 $
Less: Taxes (40%) 864,000
Earnings after taxes $1,296,000 $
Less: Preferred stock dividends 300,000
Earnings available to common shareholders $996,000 $
Less: Common stock dividends 583,200
Contribution to retained earnings $412,800
Given the results of the previous income statement calculations, complete the following statements:
• In Year 2, if Blue Hamster has 10,000 shares of preferred stock issued and outstanding, then each preferred share should expect to receive in annual dividends.
• If Blue Hamster has 500,000 shares of common stock issued and outstanding, then the firm’s earnings per share (EPS) is expected to change from in Year 1 to in Year 2.
• Blue Hamster’s before interest, taxes, depreciation and amortization (EBITDA) value changed from in Year 1 to in Year 2.
• It is to say that Blue Hamster’s net inflows and outflows of cash at the end of Years 1 and 2 are equal to the company’s annual contribution to retained earnings, $742,400 and $944,225, respectively. This is because of the items reported in the income statement involve payments and receipts of cash.

Answer 1

Question Completion:

The firm's CEO would like sales to increase by 25% next year. 1. Blue Hamster 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 80% 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, Blue Hamster expects to pay $100,000 and $642,600 of preferred and common stock dividends, respectively.

Answer:

Blue Hamster Manufacturing, Inc.

Income Statement for Year Ending December 31

Year 1 Year 2 (Forecasted)

Net sales $15,000,000 $18,750,000

Less: Operating costs, except

depreciation and amortization 12,000,000 15,000,000

Less: Depreciation & amortization

expenses 600,000 600,000

Operating income (or EBIT) $2,400,000 $3,150,000

Less: Interest expense 240,000 472,500

Pre-tax income (or EBT) $2,160,000 $2,677,500

Less: Taxes (40%) 864,000 1,071,000

Earnings after taxes $1,296,000 $1,606,500

Less: Preferred stock dividends 100,000 100,000

Earnings available to

common shareholders $1,196,000 $1,506,500

Less: Common stock dividends 583,200 642,600

Contribution to retained earnings $612,800 $863,900

Step-by-step explanation:

a) Data and Calculations:

Income Statement for Year Ending December 31

Year 1 Year 2 (Forecasted)

Net sales $15,000,000

Less: Operating costs, except

depreciation and amortization 12,000,000

Less: Depreciation & amortization

expenses 600,000 600,000

Operating income (or EBIT) $2,400,000 $

Less: Interest expense 240,000

Pre-tax income (or EBT) $2,160,000 $

Less: Taxes (40%) 864,000

Earnings after taxes $1,296,000 $

Less: Preferred stock dividends 300,000

Earnings available to

common shareholders $996,000 $

Less: Common stock dividends 583,200

Contribution to retained earnings $412,800

Year 1:

Preferred dividend per share = $300,000/10,000 = $30 per share

Year 2:

Preferred dividend per share = $100,000/10,000 = $10 per share

Year 1:

Earnings per share for common stock = $1,196,000/500,000 = $2.39 per share

Year 2:

Earnings per share for common stock = $1,506,500/500,000 = $3.01 per share

Net sales $18,750,000 ($15,000,000 * 1.25)

Less: Operating costs, except

depreciation and amortization 15,000,000 ($12,000,000 * 1.25)

Interest = 15% of $3,150,000 = $472,500

Taxes (40% * $2,677,500) = $1,071,000