BTN 11-7 Review the chapters opening feature about Jessica Matthews and her star
ID: 2447706 • Letter: B
Question
BTN 11-7 Review the chapters opening feature about Jessica Matthews and her start-up company, Uncharted Play. Assume that she is considering expanding her business to open a location in Europe. Assume her current income statement appears as follows.
UNCHARTED PLAY
Income Statement
For Year Ended December 31, 2015
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . $1,000,000
Operating expenses (55%) . . . . . . . . . 550,000
Net income . . . . . . . . . . . . . . . . . . . . $ 450,000
Uncharted Play currently has no interest-bearing debt. If it expands to open a European location, it will require a $300,000 loan. Uncharted Play has found a bank that will loan it the money on a 7% note payable. The company believes that, at least for the first few years, sales at its European location will equal $250,000, and that all expenses at both locations will continue to equal 55% of sales.
Required
1. Prepare an income statement (showing three separate columns for current operations, European, and total) for the company assuming that it borrows the funds and expands to Europe. Annual revenues for current operations are expected to remain at $1,000,000.
2. Compute the companys times interest earned under the expansion assumptions in part 1.
3. Assume sales at its European location are $400,000. Prepare an income statement (with columns for current operations, European, and total) for the company and compute times interest earned.
4. Assume sales at its European location are $100,000. Prepare an income statement (with columns for current operations, European, and total) for the company and compute times interest earned.
5. Comment on your results from parts 1 through 4.
Explanation / Answer
Situation 1. Uncharted Play Income statement Ans 1 All amounts in $ Details Current Opeartion European Operation Total Sales 1,000,000 250,000 1,250,000 Opearting Expenses @55% of sales 550,000 137,500 687,500 Profit before Interest 450,000 112,500 562,500 Interest expense(@7% on $300,000) - 21,000 21,000 Net Income after Interest 450,000 91,500 541,500 Ans 2. Times Interest Earned =Income before Interest/ Interest =562,500/21000= 26.79 Situation 2. Uncharted Play Income statement All amounts in $ Ans 3. Details Current Opeartion European Operation Total Sales 1,000,000 400,000 1,400,000 Opearting Expenses @55% of sales 550,000 220,000 770,000 Profit before Interest 450,000 180,000 630,000 Interest expense(@7% on $300,000) - 21,000 21,000 Net Income after Interest 450,000 159,000 609,000 Times Interest Earned =Income before Interest/ Interest =562,500/21000= 30.00 Situation 3.. Uncharted Play Income statement All amounts in $ Ans 4. Details Current Opeartion European Operation Total Sales 1,000,000 100,000 1,100,000 Opearting Expenses @55% of sales 550,000 55,000 605,000 Profit before Interest 450,000 45,000 495,000 Interest expense(@7% on $300,000) - 21,000 21,000 Net Income after Interest 450,000 24,000 474,000 Times Interest Earned =Income before Interest/ Interest =562,500/21000= 23.57 Observation : It is observed that after introducing European company's opeartion, the total margin of the company is getting reduced by the interest componenet on the loan for European operation. As the loan interest is fixed , higher the European sales higher is the Earning before and after interest And higher the interest coverage and vice versa.
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