In November of each year, the CFO of Barker Electronics begins the financial for

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, a city best known as the home of the John Deere Company. The CFO begins the process with the most recent year's income statement, then projects sales growth for the coming year, then estimates net income, and finally then estimates the additional earnings he can expect to retain and reinvest in the firm. The firm's income statement for 2013 follows: 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 20 percent in the next year. Depreciation expense will equal $50,000 and interest expense is estimated to be $10,000. In addition, he estimates the following relationships next year between each of the income statement expense items and sales: Note that for the coming year both depreciation expense and interest expense are projected to remain the same as in 2013. a. Estimate Barker's net income for 2014 and its addition to retained earnings under the assumption that the firm leaves its dividends paid at the 2013 level. b. Reevaluate Barker's net income and addition to retained earnings where sales grow at 40 percent over the coming year (assume dividends are the same as in 2013). This scenario requires the addition of new plant and equipment in the amount of $100,000, which increases annual depreciation to $58,000 per year, and interest expense rises to $15,000.

Explanation / Answer

(a)

(b)

(a) Net Income for 2014 ($000) 2013 2014 Sales 1500 1800 Less: COGS 1050 1260 Gross Profit 450 540 Less: Operating Cost 225 270 Less: Depreciation 50 50 Net Operating Profit 175 220 Less: Interest Expense 10 10 EBT 165 210 Less: Taxes 58 73.5 Net Income 107 136.5 Less: Dividend 20 20 Addition to Retained Earnings 87 116.5

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