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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

INCOME STATEMENT Hermann Industries is forecasting the following income statement:

Sales $8,000,000
Operating costs excluding depreciation & amortization 4,400,000
EBITDA $3,600,000
Depreciation and amortization 800,000
EBIT $2,800,000
Interest 600,000
EBT $2,200,000
Taxes (40%) 880,000
Net income $1,320,000

The CEO would like to see higher sales and a forecasted net income of $2,500,000. Assume that operating costs (excluding depreciation and amortization) are 55% of sales and that depreciation and amortization and interest expenses will increase by 10%. 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 $2,500,000 in net income?

Summary Introduction

To compute: The forecasted sales to generate net income of $2,500,000.

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

Solution:

Statement to show forecasted net income:

Accounts Title

Current

($)

Forecasted

($)

Sales 8,000,000 12,681,481
Operating costs excluding depreciation and amortization 4,400,000 6,974,815
EBITDA 3,600,000 5,706,667
Depreciation and amortization (Increased by 10%) 800,000 880,000
EBIT 2,800,000 4,826,667
Interest (Increased by 10%) 600,000 660,000
EBT 2,200,000 4,166,667
Taxes (40%) 880,000 1,666,667
Net income 1,320,000 2,500,000

Working note:

Calculations for forecasted amount,

EBT=Net Income(1Tax Rate)=$2,500,000(10

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