Question

Problem 17.04 (Pro Forma Income Statement) eBook Austin Grocers recently reported the following 2021 income statement (in millions of dollars): Sales $700 Operating costs including depreciation 500 EBIT $200 Interest 40 EBT $160 Taxes (25%) 40 Net income $120 Dividends $40 Addition to retained earnings $80 For the coming year, the company is forecasting a 35% 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. a. What is Austin's projected 2022 net income? Enter your answer in millions. For example, an answer of $13,000,000 should be entered as 13. Do not round intermediate calculations. Round your answer to two decimal places. $ million b. What is the expected growth rate in Austin's dividends? Do not round intermediate calculations. Round your answer to two decimal places. % Grade it Now Save & Continue Continue without saving

Answer 1

Austin's projected 2022 net income is $147.19 million. Since the net income is increasing and the dividend payout ratio remains constant, the expected growth rate in Austin's dividends is 0%.

Step-by-step explanation:

To calculate Austin Grocers' projected 2022 net income, we'll follow these steps:

Calculate the forecasted sales for 2022 by increasing 2021's sales by 35%.

Determine operating costs for 2022, which are expected to be 75% of the forecasted sales.

Subtract operating costs and interest from sales to find earnings before taxes (EBT).

Calculate taxes using the constant tax rate of 25%, and subtract from EBT to find the net income.

For the expected growth rate in Austin's dividends, since the dividend payout ratio remains constant and net income is expected to increase, dividends will grow at the same rate as net income.

Calculations:

Projected Sales for 2022 = $700 million * 1.35 = $945 million.

Projected Operating Costs = $945 million * 0.75 = $708.75 million.

Projected EBIT = Projected Sales - Projected Operating Costs = $945 million - $708.75 million = $236.25 million.

Projected EBT = Projected EBIT - Interest = $236.25 million - $40 million = $196.25 million.

Projected Taxes = Projected EBT * 0.25 = $196.25 million * 0.25 = $49.06 million.

Projected Net Income = Projected EBT - Projected Taxes = $196.25 million - $49.06 million = $147.19 million.

Given that dividends are expected to remain constant at $40 million and the net income is increasing, the growth rate in dividends is effectively 0%.