Question

DO NOT USE EXCEL PLS EXPLAIN EACH STEP

Use AstroTurf Company's income statement below to answer the following two questions.

a. Calculate AstroTurf’s EBITDA.
b. Determine what level of sales would generate $3.3m in net income for the following year (Year 2), knowing that operating costs (excl. depreciation and amortization) will increase by 5%. The tax rate will not change.

Year 1 Income Statement:
Sales: $11,000,000
Operating costs (excl. depreciations & amortization): $4,500,000
Depreciation and amortization: $1,500,000
Interest: $700,000
Net Income: $2,800,000
Tax Rate: 35%*

Answer 1

Solution:

a. EBITDA = Sales - Operating costs

= $11,000,000 - 4,500,000 = $6,500,000

b. Here, we will calculate the level of sales by making reverse calculation( i.e. computation from bottom to top):

	Amount	Computation
1.Sales	$12,001,923	(2)+(3)
2.Op. costs	4,725,000
3.EBITDA	$7,276,923	(4)+(5)+(6)
4.Dep. & Amortization	1,500,000	given
5.Interest	700,000	given
6.EBT	$5,076,923	(6)+(7)
7.Tax @35%	1,776,923	(3,300,000/0.65)*0.35
8.Net income	$3,300,000	Given