Question

Your forecasted income statement shows sales of $1,362,000, cost of goods sold at $830,000, depreciation expense of $310,000, and a forecasted free cash flow of $470,200. What are your forecasted earnings? What is your tax rate?

Answer 1

Forecasted earning = $160,200

Tax rate = 27.84%

Explanation:

The calculation of forecasted earning and tax rate is shown below:-

Earnings before income and taxes = Sales - Cost of goods sold - Depreciation Expense

= $1,362,000 - $830,000 - $310,000

= $222,000

So,

Forecasted Free cash flow = Net Income + Depreciation

$470,200 = Net Income + $310,000

Net Income = $470,200 - $310,000

= $160,200

Now, the Tax rate is

Net Income = EBIT × (1 - Tax Rate)

$160,200 = $222,000 × (1 - Tax rate)

(1 - Tax rate) = $160,200 ÷ $222,000

(1 - Tax rate) = 0.721622

Tax rate = 27.84%