Review the chapter's opening feature about Annie Withey and her start-up company, Annie's, Inc. Assume that she is considering expanding her business to open a headquarters in Europe. Assume her current income statement is as follows.
ANNIE'S, INC.
Income Statement
For Year Ended December 31, 2013
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . $10,000,000
Operating expenses (55% of sales) ....... 5,500,000
Net income . . . . . . . . . . . . . . . . . . ..... $ 4,500,000
Also assume that Annie's, Inc. currently has no interest-bearing debt. If it expands to open a European location, it will require a $3,000,000 loan. Annie's, Inc. has found a bank that will loan it the money by taking on a 7% note payable. The company believes that, at least for the first few years, sales at its European location will be $2,500,000, and that all expenses will follow the same patterns as its current locations.
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 $10,000,000.
2. Compute the company's times interest earned under the expansion assumptions in part 1.
3. Assume sales at its European location are $4,000,000. 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 $1,000,000. 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.