Cute Camel Woodcraft 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. Cute Camel 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 40% of its pre-tax income or earnings before taxes (EBT).

4. In Year 2, Cute Camel expects to pay $100,000 and $1,025,100 of preferred and common stock dividends, respectively.

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

Cute Camel Woodcraft Company Income Statement for Year Ending December 31

1. Net sales (Year 1) $15,000,000 Year 2 $_________ (Forecasted)

2. Less: Operating costs, except depreciation and amortization (Year 1) 10,500,000 Year 2 (Forecasted) _________

3. Less: Depreciation and amortization expenses (Year 1) 600,000 Year 2 (Forecasted) $600,000

4. Operating income (or EBIT) (Year 1) $3,900,000 Year 2 (Forecasted)  $_________

5. Less: Interest expense (Year 1) 390,000 Year 2 (Forecasted) _________

6. Pre-tax income (or EBT) (Year 1) 3,510,000 Year 2 (Forecasted) _________

7. Less: Taxes (40%) (Year 1) 1,404,000 Year 2 (Forecasted) _________

8. Earnings after taxes (Year 1) $2,106,000 Year 2 (Forecasted) $_________

9. Less: Preferred stock dividends (Year 1) 100,000 Year 2 (Forecasted) _________

10. Earnings available to common shareholders (Year 1) 2,006,000 Year 2 (Forecasted) _________

11. Less: Common stock dividends (Year 1) 842,400 Year 2 (Forecasted) _________

Contribution to retained earnings (Year 1) $1,163,600 Year 2 (Forecasted) $1,437,650

Part 2:

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

1a. In Year 2, if Cute Camel has 5,000 shares of preferred stock issued and outstanding, then each preferred share should expect to receive $_______ in annual dividends.

2a. If Cute Camel 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.

3a.  Cute Camel’s earnings before interest, taxes, depreciation and amortization (EBITDA) value changed from $_______ in Year 1 to $_______ in Year 2.

4a.  It is (Correct or Incorrect) to say that Cute Camel’s net inflows and outflows of cash at the end of Years 1 and 2 are equal to the company’s annual contribution to retained earnings, $1,163,600 and $1,437,650, respectively. This is because (All but one or All) of the items reported in the income statement involve payments and receipts of cash.

ANSWER

Cute Camel Woodcraft Company Year 2 Financial Analysis and Projections

Let’s calculate the Year 2 income statement data for Cute Camel Woodcraft Company based on the provided information:

1. Net Sales (Year 1) = $15,000,000
Year 2 (Forecasted) = $15,000,000 * 1.25 = $18,750,000

2. Less: Operating Costs, Except Depreciation and Amortization (Year 1) = $10,500,000
Year 2 (Forecasted) = $18,750,000 * 0.70 = $13,125,000

3. Less: Depreciation and Amortization Expenses (Year 1) = $600,000
Year 2 (Forecasted) = $600,000 (constant)

4. Operating Income (or EBIT) (Year 1) = $3,900,000
Year 2 (Forecasted) = $18,750,000 – $13,125,000 – $600,000 = $5,025,000

5. Less: Interest Expense (Year 1) = $390,000
Year 2 (Forecasted) = $5,025,000 * 0.15 = $753,750

6. Pre-tax Income (or EBT) (Year 1) = $3,510,000
Year 2 (Forecasted) = $5,025,000 – $753,750 = $4,271,250

7. Less: Taxes (40%) (Year 1) = $1,404,000
Year 2 (Forecasted) = $4,271,250 * 0.40 = $1,708,500

8. Earnings After Taxes (Year 1) = $2,106,000
Year 2 (Forecasted) = $4,271,250 – $1,708,500 = $2,562,750

9. Less: Preferred Stock Dividends (Year 1) = $100,000
Year 2 (Forecasted) = $100,000 (constant)

10. Earnings Available to Common Shareholders (Year 1) = $2,006,000
Year 2 (Forecasted) = $2,562,750 – $100,000 = $2,462,750

11. Less: Common Stock Dividends (Year 1) = $842,400
Year 2 (Forecasted) = $2,462,750

Now, let’s answer the questions in Part 2:

1a. In Year 2, if Cute Camel has 5,000 shares of preferred stock issued and outstanding, then each preferred share should expect to receive $20 in annual dividends ($100,000 / 5,000).

2a. If Cute Camel has 400,000 shares of common stock issued and outstanding, then the firm’s earnings per share (EPS) is expected to change from $2.52 in Year 1 ($2,006,000 / 400,000) to $6.16 in Year 2 ($2,462,750 / 400,000).

3a. Cute Camel’s earnings before interest, taxes, depreciation, and amortization (EBITDA) value changed from $4,500,000 in Year 1 ($3,900,000 + $600,000) to $5,025,000 in Year 2.

4a. It is Incorrect to say that Cute Camel’s net inflows and outflows of cash at the end of Years 1 and 2 are equal to the company’s annual contribution to retained earnings, $1,163,600 and $1,437,650, respectively. This is because not all of the items reported in the income statement involve payments and receipts of cash. Items like depreciation and amortization, taxes, and dividends affect the income statement but may not involve actual cash movements.

In summary, Cute Camel’s financial statements for Year 2 show an increase in sales, earnings per share, and EBITDA compared to Year 1. However, it’s essential to recognize that not all items on the income statement directly correlate with cash flows, as some are accounting measures.