Consider the following scenario: Green Caterpillar Garden Supplies Inc.'s income statement reports data for its first year of operation. The firm's CEO would like sales to increase by 25% next year. 1. Green Caterpillar 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 75.00% 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, Green Caterpillar expects to pay $300,000 and $938,081 of preferred and common stock dividends, respectively.
Consider the following scenario: Green Caterpillar Garden Supplies Inc.'s income statement reports data for its first year of operation. The firm's CEO would like sales to increase by 25% next year. 1. Green Caterpillar 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 75.00% 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, Green Caterpillar expects to pay $300,000 and $938,081 of preferred and common stock dividends, respectively.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Consider the following scenario:
Green Caterpillar Garden Supplies Inc.'s income statement reports data for its first year of operation. The firm's CEO would like sales to increase by
25% next year.
1. Green Caterpillar 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 75.00% 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, Green Caterpillar expects to pay $300,000 and $938,081 of preferred and common stock dividends, respectively.
Complete the Year 2 income statement data for Green Caterpillar, then answer the questions that follow. Round each dollar value to the nearest whole
dollar.
Green Caterpillar Garden Supplies Inc.
Income Statement
Years Ending December 31
Net sales
Fixed operating costs, except depreciation and amortization
Depreciation and amortization expenses
Net operating income (or EBIT)
Interest
Earnings before taxes (or EBT)
Taxes (40%)
Net Income
Preferred dividends
Earnings available to common stockholders (EAC)
Common dividends
Addition to retained earnings
Year 2 (Forecasted)
$
$
(600,000)
$846,544
Year 1
$15,000,000
(11,250,000)
(600,000)
$3,150,000
(315,000)
$2,835,000
(1,134,000)
$1,701,000
(300,000)
$1,401,000
(765,450)
$635,550
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