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 15% increase in sales, and it expects that its year-end operating costs, including depreciation, will equal 65% of sales. Austin's tax rate, interest expense, and dividend payout ratio are all expected to remain constant.

A. 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.
$ ____________million

B. 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

From the below excel sheet we detremine that
Net Income = 145.05 million
Expected growth in dividend = (Dividend 2017 - Dividend 2016)/ Dividend 2016 = (48.35- 32)/32 = 51.09%

	2016	2017
Sales	$700	805.00	Sales increase of 15% so 700*(1+15%)
Operating costs including depreciation	500	523.25	Cost including depreciation = 65% * 805
EBIT	$200	281.75	Sales - expenses
Interest	40	40.00	No change in Interest
EBT	$160	241.75	EBIT-Interest
Taxes (40%)	64	96.70	Taxes = 40%* EBT
Net income	$96	145.05	Net income = EBT-Taxes
Dividends	$32	48.35	for 2016 Pay out ratio = Dividends/Net income = 1/3 so for 2017 dividen =(145.05* 1/3)
Addition to retained earnings	$64	96.70	Net income* 2/3