Intermediate Problems 7 1217 Pro Forma Income Statement

Intermediate Problems 7 1217 7pro Forma Income Statementat The End Of

At the end of last year, Roberts Inc. reported the following income statement (in millions of dollars): Sales $3,000; Operating costs excluding depreciation $2,450; EBITDA $550; Depreciation $250; EBIT $300; Interest $125; EBT $175; Taxes (40%) $70; Net income $105. Looking ahead, the company’s CFO has assembled future estimates: sales will increase by 10%, operating costs excluding depreciation are proportional to sales, depreciation increases at the same rate as sales, interest remains unchanged, and the tax rate remains at 40%. Using this information, determine the forecasted year-end net income for Roberts Inc.

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Roberts Inc. is planning its financial outlook based on recent historical data and future projections. To forecast the upcoming year's net income, it is essential to analyze each component of the income statement methodically, considering the assumptions provided by the CFO.

Initial data shows that last year’s sales were $3,000 million, with operating costs excluding depreciation at $2,450 million, resulting in an EBITDA of $550 million. Depreciation was $250 million, leading to an EBIT of $300 million, with interest expenses at $125 million, and taxes at 40%, totaling $70 million. This culminated in a net income of $105 million.

For the forecast, the sales are expected to increase by 10%, raising sales to $3,300 million ($3,000 million 1.10). The operating costs excluding depreciation are projected to be proportional to this new sales figure at 80%, amounting to $2,640 million ($3,300 million 0.80). Since depreciation increases at the same rate as sales, depreciation will rise from $250 million to $275 million ($250 million * 1.10).

EBIT, which is earnings before interest and taxes, will then be recalculated as sales minus operating costs and depreciation. Using the projected figures, EBIT = $3,300 million - $2,640 million - $275 million = $385 million. Interest expenses are expected to stay at $125 million, as per the assumptions.

With a consistent tax rate of 40%, taxable income (EBT) will be EBIT minus interest costs: $385 million - $125 million = $260 million. Taxes are 40% of this amount, which equals $104 million ($260 million * 0.40). Consequently, net income can be calculated as taxable income minus taxes: $260 million - $104 million = $156 million.

Therefore, the forecasted net income for Roberts Inc. in the upcoming year is approximately $156 million, reflecting the expected growth in sales and corresponding changes in operating costs and depreciation, with maintenance of interest costs and tax rates. This forecast provides insight into the company's expected profitability under current assumptions and future market conditions.

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