Question

PRO FORMA INCOME STATEMENT

Austin Grocers recently reported the following 2016 income statement (in millions of dollars):

	Sales	$700
	Operating costs including depreciation	500
	EBIT	$200
	Interest	40
	EBT	$160
	Taxes (40%)	64
	Net income	$96
	Dividends	$32
	Addition to retained earnings	$64

For the coming year, the company is forecasting a 30% increase in sales, and it expects that its year-end operating costs, including depreciation, will equal 75% of sales. Austin's tax rate, interest expense, and dividend payout ratio are all expected to remain constant.

1. What is Austin's projected 2017 net income? Enter your answer in millions. For example, an answer of $13,000,000 should be entered as 13. Round your answer to two decimal places.
   $
2. 
   
3. What is the expected growth rate in Austin's dividends? Do not round your intermediate calculations. Round your answer to two decimal places.
   %

Answer 1

Answer a.

2016:

Dividend Payout Ratio = Dividends / Net Income
Dividend Payout Ratio = $32 million / $96 million
Dividend Payout Ratio = 33.333%

2017:

Sales = $700 million + 30% * $700 million
Sales = $910 million

Operating cost including depreciation = $910 million * 75%
Operating cost including depreciation = $682.50 million

Dividends = $112.50 million * 33.33%
Dividends = $37.50 million

Answer b.

Growth rate in dividends = (Dividends, 2017 - Dividends, 2016) / Dividends, 2016
Growth rate in dividends = ($37.50 million - $32 million) / $32 million
Growth rate in dividends = $5.50 million / $32 million
Growth rate in dividends = 0.1719 or 17.19%