Question

In November of each​ year, the CFO of Barker Electronics begins the financial forecasting process to determine the​ firm's projected needs for new financing during the coming year. Barker is a small electronics manufacturing company located in​ Moline, Illinois, which is best known as the home of the John Deere Company. The CFO begins the process with the most recent​ year's income​ statement, projects sales growth for the coming​ year, and then estimates net income and finally the additional earnings he can expect to retain and reinvest in the firm. The​ firm's income statement for 2015​ follows:

Income Statement

12/31/2015

Sales

$1,500,000

Cost of goods sold

900,000

Gross profit

$600,000

Operating costs

210,000

Depreciation expense

46,000

Net operating profit

$344,000

Interest expense

12,000

Earnings before taxes

$332,000

Taxes

112,880

Net income

$219,120

Dividends

$24,000

Addition to retained earnings

$195,120

.The electronics business has been growing rapidly over the past 18 months as the economy​ recovers, and the CFO estimates that sales will expand by 16 percent in the next year. In​ addition, he estimates the following relationships between each of the income statement expense items and​ sales:  

COGS/sales		60​%
Operating​ expenses/sales		14​%
Depreciation expense	​$	46,000
Interest expense	​$	12,000
Tax rate		34​%

.Note that for the coming year both depreciation expense and interest expense are projected to remain the same as in 2015. a. Estimate​ Barker's net income for 2016 and its addition to retained earnings under the assumption that the firm leaves its dividends paid at the 2015 level. b. Reevaluate​ Barker's net income and addition to retained earnings if sales grow at 32 percent over the coming year.​ However, this scenario requires the addition of new plant and equipment in the amount of ​$120,000​, which increases annual depreciation to $52,000 per​ year, and interest expense rises to $18,000.

Answer 1