FUZzy Button Clothing Company'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. Fuzzy Button 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 (exduding depreciation and amortization) remain at 75 % 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, Fuzzy Button expects to pay $100,000 and $833,850 of preferred and common stock dividends, respectively.
Complete the Year 2 income statement data for Fuzzy Button, then answer the questions that follow.
Fuzzy Button Clothing Company
Income Statement for Year Ending December 31
Year 2
Year 1 (Forecasted)
Net sales $15,000,000
Less: Operating costs, except depreciation
and amortization 11,250,000
Less: Depreciation and amortization expenses 600,000 600,000
Operating income (or EBIT) $3,150,000
Less: Interest expense 315,000 Pre-tax
income (or EBT) 2,835,000
Less: Taxes (40%) 1,134,000
Earnings after taxes $1,701,000 $2,084,625
Less: Preferred stock dividends 300,000 100,000
Earnings available to common shareholders 1,401,000
Less: Common stock dividends 765,450
Contribution to retained earnings $635,550 $846,544
Given the results of the previous income statement calculations, complete the following statements:
In Year 2, if Fuzzy Button has 5,000 shares of preferred stock issued and outstanding, then each preferred share should expect to receivein annual dividends.
If Fuzzy Button has 400,000 shares of common stock issued and outstanding, then the firm's earnings per share (EPS) is expected to change fromin Year 1 toin Year 2.
Fuzzy Button's before interest, taxes, depreciation and amortization (EBITDA) value changed fromin Year 1 toin Year 2.
It isto say Fuzzy Button's net inflows and outflows of cash year 1 and 2 are equal to the company's annual contribution to retained earnings, $920,600 and $1,150,775, respectively. This is becauseof the item reported in the income statements involve payments and receipts of cash.