At the end of last year, Roberts Inc. reported the following income statement (i

Question

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 to the following year, the company's CFO has assembled this information:

Year-end sales are expected to be 13% higher than the $3 billion in sales generated last year.

Year-end operating costs excluding depreciation are expected to equal 70% of year-end sales.

Depreciation is expected to increase at the same rate as sales. Interest costs are expected to remain unchanged.

The tax rate is expected to remain at 40%.

What will be the forecast for Roberts' year-end net income?

Explanation / Answer

Working notes:

(1) Depreciation = EBITDA - EBIT = $(550 - 300) = $250 million

(2) End-of-year depreciation = $250 million x 1.13 = $282.5 million

(3) End-of-year sales = $3,000 million x 1.13 = $3,390 million

(4) Operating costs excluding depreciation = $3,390 million x 0.7 = $2,373 million

End-of-Last year End-of-Current year (Forecast) $ Million $ Million Sales (A) 3,000 3,390 Operating Costs (Excl Depreciation) (B) 2,450 2,373 EBITDA (C) = (A) - (B) 550 1,017 Depreciation (D) 250 282.5 EBIT (E) = (C) - (D) 300 734.5 Interest expense (F) 125 125.0 EBT (G) = (E) - (F) 175 609.5 Tax @40% (H) = (G) x 0.4 70 243.8 NET INCOME (G) - (H) 105 365.7

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