Question

58 part a:

Billy's Burgers

Figures in $ millions
Income Statement	2010	Balance Sheet	2010
Net Sales	246.0	Assets
Costs exc. Dep.	187.0	Cash	8.0
EBITDA	59.0	Accts. Rec.	21.0
Depreciation	17.2	Inventories	23.0
EBIT	41.8	Total Current Assets	52.0
Interest	12.0	Net PP&E	145.0
Pretax Income	29.8	Total Assets	197.0
Taxes	10.4
Net Income	19.4	Liabilities and Equity
		Accts. Payable	18.0
		Long-Term Debt	82.0
		Total Liabilities	100.0
		Total Stockholders' Equity	97.0
		Total Liabilities and Equity	197.0

Assuming Fixed assets do not change (so depreciation is unchanged) and no additional borrowing (so interest expense is unchanged), using the percent of sales method, what would you expect net income to be closest to in 2011 if sales are expected to grow by 10% and the the tax rate is 35%.

	a.	$19.40 million
	b.	$21.34 million
	c.	$23.21million
	d.	$24.83 million

part b 60:

Luther Corporation

                                       Consolidated Income Statement

                                 Year ended December 31 (in $millions)

	2006	2005
Total sales	610.1	579.1
Cost of sales	-500.2	-378.8
Gross profit	109.9	200.3
Selling, general, and administrative expenses	-40.5	-39.6
Research and development	-24.6	-20.9
Depreciation and amortization	-3.6	-3.7
Operating income	41.2	136.1
Other income	--	--
Earnings before interest and taxes (EBIT)	41.2	136.1
Interest income (expense)	-25.1	-15.2
Pretax income	16.1	120.9
Taxes	-5.5	-42.315
Net income	10.6	78.585
Price per share	$16	$15
Sharing outstanding (millions)	10.2	8.0
Stock options outstanding (millions)	0.3	0.2
Stockholders' Equity	126.6	63.6
Total Liabilities and Stockholders' Equity	533.1	386.7

Refer to the income statement above. Luther's return on equity (ROE) for the year ending December 31, 2006 is closest to ________.

	a.	9.46%
	b.	6.38%
	c.	8.37%
	d.	12.42%

Answer 1

1. First find Costs excluding depreciation to Sales percentage for 2010=$187/$246=76.02%

Now we have to forecast for 2011

Sales increased by 10% becoming $246*(1+10%)=$270.6

EBITDA=Sales-costs=$270.6-(76.02%*$270.6)=$64.9

Depreeciation remains same as 2010 number

EBIT=EBITDA-Depreciation=$64.9-$17.2=$47.7

Interest also remains constant in 2011 too

Pre tax Income=EBIT-interest=$47.7-$12=$35.7

Net income=Pre tax Income*(1-tax rate)=$35.7*(1-35%)=$23.21 million (Option c is correct)

2. Return on Equity=net Income/Total shareholder's equity=$10.6/$126.6=8.37%  (Option c is correct)