Chapter 3, Problem 15P

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

Chapter
Section

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

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 ($) Forecasted ($) Sales 10,000,000 11,782,222 Operating costs excluding depreciation and amortization 5,500,000 6,480,222 EBITDA 4,500,000 5,302,000 Depreciation and amortization (Increased by 6%) 1,200,000 1,272,000 EBIT 3,300,000 4,030,000 Interest (Increased by 6%) 500,000 530,000 EBT 2,800,000 3,500,000 Taxes (40%) 1,120,000 1,400,000 Net income 1,680,000 2,100,000

Working note:

Calculations for EBT,

EBT=NetĀ Income(1āTaxĀ Rate)=\$2,100,000(1ā0

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