Cold Goose Metal Works 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.Cold Goose 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 70% of net sales, and its depreciation and amortization expenses remain constant from year to year.3.The company’s tax rate remains constant at 25% of its pre-tax income or earnings before taxes (EBT).4.In Year 2, Cold Goose expects to pay $200,000 and $1,922,063 of preferred and common stock dividends, respectively. Complete the Year 2 income statement data for Cold Goose, then answer the questions that follow. Be sure to round each dollar value to the nearest whole dollar. Cold Goose Metal Works Inc. Income Statement for Year Ending December 31 Year 1Year 2 (Forecasted)Net sales$30,000,000 Less: Operating costs, except depreciation and amortization21,000,000 Less: Depreciation and amortization expenses1,200,0001,200,000Operating income (or EBIT)$7,800,000 Less: Interest expense780,000 Pre-tax income (or EBT)7,020,000 Less: Taxes (25%)1,755,000 Earnings after taxes$5,265,000 Less: Preferred stock dividends200,000 Earnings available to common shareholders5,065,000 Less: Common stock dividends1,579,500 Contribution to retained earnings$3,485,500$4,284,812 Given the results of the previous income statement calculations, complete the following statements:•In Year 2, if Cold Goose has 5,000 shares of preferred stock issued and outstanding, then each preferred share should expect to receive_____ in annual dividends.If Cold Goose has 400,000 shares of common stock issued and outstanding, then the firm’s earnings per share (EPS) is expected to change from_____in Year 1 to____in Year 2Cold Goose’s earnings before interest, taxes, depreciation and amortization (EBITDA) value changed from___in Year 1 to___in Year 2

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EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 20P

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Cold Goose Metal Works 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.	Cold Goose 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 70% of net sales, and its depreciation and amortization expenses remain constant from year to year.
3.	The company’s tax rate remains constant at 25% of its pre-tax income or earnings before taxes (EBT).
4.	In Year 2, Cold Goose expects to pay $200,000 and $1,922,063 of preferred and common stock dividends, respectively.

Complete the Year 2 income statement data for Cold Goose, then answer the questions that follow. Be sure to round each dollar value to the nearest whole dollar.

	Cold Goose Metal Works Inc.
Income Statement for Year Ending December 31
	Year 1	Year 2 (Forecasted)
Net sales	$30,000,000
Less: Operating costs, except depreciation and amortization	21,000,000
Less: Depreciation and amortization expenses	1,200,000	1,200,000
Operating income (or EBIT)	$7,800,000
Less: Interest expense	780,000
Pre-tax income (or EBT)	7,020,000
Less: Taxes (25%)	1,755,000
Earnings after taxes	$5,265,000
Less: Preferred stock dividends	200,000
Earnings available to common shareholders	5,065,000
Less: Common stock dividends	1,579,500
Contribution to retained earnings	$3,485,500	$4,284,812

Given the results of the previous income statement calculations, complete the following statements:

•

In Year 2, if Cold Goose has 5,000 shares of preferred stock issued and outstanding, then each preferred share should expect to receive_____ in annual dividends.

If Cold Goose has 400,000 shares of common stock issued and outstanding, then the firm’s earnings per share (EPS) is expected to change from_____in Year 1 to____in Year 2

Cold Goose’s earnings before interest, taxes, depreciation and amortization (EBITDA) value changed from___in Year 1 to___in Year 2

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