Question

Pro forma income statementAustin Grocers recently reported the following 2016 income statement (in millions of dollars):Sales $700Operating costs including depreciation 500EBIT $200Interest 40EBT $160Taxes (40%) 64Net income $96Dividends $32Addition to retained earnings $64For the coming year, the company is forecasting a 20% increase in sales, and it expects that its year-end operating costs, including depreciation, will equal 75% 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? Enter your answer in millions. For example, an answer of $13,000,000 should be entered as 13. Round your answer to two decimal places.$ millionWhat is the expected growth rate in Austin's dividends? Do not round your intermediate calculations. Round your answer to two decimal places.%

Answer 1

$102 million and 6.25%

Step-by-step explanation:

The computation is shown below:

a. For net income

As we know that

Net income = (Earning before interest and taxes - interest) × (1 - tax rate)

where,

EBIT is calculated after finding out the sales, operating cost which is given below:

Sales = $700 million × 1.20 = $840 million

And, the operating costs = 75% × $840 million = $630 million

So, the EBIT is

= $840 million - $630 million

= $210 million

Now the net income is

= ($210 million - $40 million) × (1 - 40%)

= $102 million

2. Now expected growth rate in net income is

= (Latest year Net income ÷ previous year net income) - 1

= ($102 million ÷ $96 million) -1

= 6.25%

Since dividend payout ratio is same so the growth rate in dividend should be equal to the growth rate in net income i.e 6.25%