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Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937

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Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937
Textbook Problem
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INCOME STATEMENT Edmonds Industries is fore-casting the following income statement:

Sales $10,000,000
Operating costs excluding depreciation & amortization 5,500,000
EBITDA $ 4,500,000
Depreciation and amortization 1,200,000
EBIT $ 3,300,000
Interest 500,000
EBT $ 2,800,000
Taxes (40%) 1,120,000
Net income $ 1,680,000

The CEO would like to see higher sales and a forecasted net income of $2,100,000. Assume that operating costs (excluding depreciation and amortization) are 55% of sales and. that depreciation and amortization and interest expenses will increase by 6%. The tax rate, which is 40%, will remain the same. (Note that while the tax rate remains constant, the taxes paid will change.) What level of sales would generate $2,100,000 in net income?

Summary Introduction

To compute: The forecasted sales to generate net income of $2,100,000.

Introduction:

Income Statement:

A part of financial statements that lists the income and expenses of business for an accounting year is called income statement. It is prepared at the end of accounting period to know the profitability of the business.

Explanation

Statement to show forecasted net income:

Accounts Title

Current

($)

Forecasted

($)

Sales10,000,00011,782,222
Operating costs excluding depreciation and amortization5,500,0006,480,222
EBITDA4,500,0005,302,000
Depreciation and amortization (Increased by 6%)1,200,0001,272,000
EBIT3,300,0004,030,000
Interest (Increased by 6%)500,000530,000
EBT2,800,0003,500,000
Taxes (40%)1,120,0001,400,000
Net income1,680,0002,100,000

Working note:

Calculations for EBT,

EBT=Net Income(1Tax Rate)=$2,100,000(10

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