Question

Austin Grocers recently reported the following 2019 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 60% of sales. Austin's tax rate, interest expense, and dividend payout ratio are all expected to remain constant.

1. What is Austin's projected 2020 net income? Enter your answer in millions. For example, an answer of $13,000,000 should be entered as 13. Round your answer to two decimal places.
   $   million
2. 
   
3. What is the expected growth rate in Austin's dividends? Do not round intermediate calculations. Round your answer to two decimal places.
     %

Answer 1

- Preparing Austin's Projected Income sattement for 2020:-

Particular	Amount (in millions of dollars)
Net Sales	945.00
Less: Operating costs including depreciation	567.00
EBIT	378.00
Interest Expenses	40.00
Earning before tax	338.00
Taxes @25%	84.50
Net Income	253.50
Dividends@33.33%	84.50
Additions to Retained earnings	169.00

Project Net Income is $253.50 millions

Note- Dividend Payout ratio of 2019 = Dividend/net Income

= $40/$120

= 33.33%

Taxes, Interest expenses and Dividend Payout ratio will be constant

b). Expected Growth rate in Austin's Dividend = (Current Dividend- Previous Dividend)/Previous Dividend

= ($84.50 - $40)/$40

= 111.25%