Cute Camel Woodcraft Company’s income statement reports data forits first year of operation. The firm’s CEO would like sales toincrease by 25% next year.
| 1. | Cute Camel is able to achieve this level of increased sales,but its interest costs increase from 10% to 15% of earnings beforeinterest and taxes (EBIT). |
| 2. | The company’s operating costs (excluding depreciation andamortization) remain at 70% of net sales, and its depreciation andamortization expenses remain constant from year to year. |
| 3. | The company’s tax rate remains constant at 25% of its pre-taxincome or earnings before taxes (EBT). |
| 4. | In Year 2, Cute Camel expects to pay $100,000 and $1,281,375 ofpreferred and common stock dividends, respectively. |
Complete the Year 2 income statement data for Cute Camel, thenanswer the questions that follow. Be sure to round each dollarvalue to the nearest whole dollar.
| Cute Camel Woodcraft Company | |
|---|
Income Statement for Year Ending December 31 |
|---|
| Year 1 | Year 2 (Forecasted) |
| Net sales | $15,000,000 | |
| Less: Operating costs, except depreciation andamortization | 10,500,000 | |
| Less: Depreciation and amortization expenses | 600,000 | 600,000 |
| Operating income (or EBIT) | $3,900,000 | |
| Less: Interest expense | 390,000 | |
| Pre-tax income (or EBT) | 3,510,000 | |
| Less: Taxes (25%) | 877,500 | |
| Earnings after taxes | $2,632,500 | |
| Less: Preferred stock dividends | 100,000 | |
| Earnings available to common shareholders | 2,532,500 | |
| Less: Common stock dividends | 1,053,000 | |
| Contribution to retained earnings | $1,479,500 | $1,822,062 |
Given the results of the previous income statement calculations,complete the following statements:
| • | In Year 2, if Cute Camel has 5,000 shares of preferred stockissued and outstanding, then each preferred share should expect toreceive $20.00    in annual dividends. |
| • | If Cute Camel has 400,000 shares of common stock issued andoutstanding, then the firm’s earnings per share (EPS) is expectedto change from $8.78    in Year 1 to $10.68   in Year 2. |
| • | Cute Camel’s earnings before interest, taxes, depreciation andamortization (EBITDA) value changed from    in Year1 to    in Year 2. |
| • | It is    to say that Cute Camel’s net inflowsand outflows of cash at the end of Years 1 and 2 are equal to thecompany’s annual contribution to retained earnings, $1,479,500 and$1,822,062, respectively. This is because    of theitems reported in the income statement involve payments andreceipts of cash. |
