Question

Austin Grocers recently reported the following 2018 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 20% increase in sales, and it expects that its year-end operating costs, including depreciation, will equal 60% of sales. Austin's tax rate, interest expense, and dividend payout ratio are all expected to remain constant.

1. What is Austin's projected 2019 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
2. 
   
3. What is the expected growth rate in Austin's dividends? Do not round intermediate calculations. Round your answer to two decimal places.
     %

Answer 1

a). Expected Income Statement:

Particulars	Calculation	Amount
Expected Sales	700 x 1.20	$840.00
Less: Costs	0.60 x 840	$504.00
EBIT	840 - 504	$336.00
Less: Interest		$ 40.00
EBT	336 - 40	$296.00
Less: Taxes (40%)	296 x 0.40	$118.40
Projected Net Income	296 - 118.40	$177.60

b). Projected Dividends = Projected Net Income x DPR

= $177.60 x [$32/$96] = $177.60 x 0.3333 = $59.20

Expected Growth Rate = [Projected Dividends / Current Dividends] - 1

= [$59.20/ $32] - 1 = 1.85 - 1 = 0.85, or 85%