1. In class, we set up an income statement for a company that has sales of 26 million per year. The goal of this lab is to modify the income statement to allow consideration of an advertising campaign. Imagine this company wants to launch an advertising campaign to drive sales.

Assume the following:

• Each $100,000 in advertising results in $300,000 of increased sales.

• Income taxes are 21% of Earnings

• There are 464,286 shares of common stock

• Maximum advertising budget is $4,000,000

• Assume cost of goods is 55% of sales revenue

a) If the company wants to make sure that Earnings per share remain above $4.00, how much should they spend on advertising? As part of your answer, prepare a data table that shows earnings per share as a function of advertising costs. Highlight all values above $4.00 in green

b) Prepare a second data table where you vary advertising costs and assumption about how advertising drives sales (consider range of $100,000 of increased sales per $100,000 of advertising to $800,000. Highlight all earnings per share values above $4.00 in green). Hint: In the first part, we are assuming that spending $100,000 on advertising increases sales by a factor of three. So for every $1 spend on advertising, sales increase by 3 times $1. Here I’m saying – what if the factor is 2X or 4X or 5X instead of 3X? So how can you modify sales revenue to include this advertising impact factor?)

2. In class, we created a balance sheet for the company for years ending December 31, 2018 and 2019. Suppose in 2020 the following changes occur. Prepare a new Balance sheet that includes the year ending December 31, 2020 and that shows the changes from 2019. If an item isn’t listed below, assume there is no change over 2019.

Cash increases by $1 million

Accounts receivables increase by 10%

Prepaid expenses decrease by 5%

Accumulated depreciation increases by 10%

Accounts payable increase by 20%

Income tax payable decreases by 5%

a) Prepare the new balance sheet.

b) Explain what the change in Total Owner's Equity means.

c) Is the company in a better or worse position in 2020 than 2018? Explain your answer.

Answer rating: 100% (QA)

a To calculate the earnings per share EPS and determine the advertising budget we can use the given ... View the full answer