7 Problem 17.3: In November of each year, the CFO of Harrison Piping begins the financial...

Transcribed Image Text:

7 Problem 17.3: In November of each year, the CFO of Harrison Piping begins the financial forecasting process to determine the firm's projected needs for new financing during the coming year. Harrison is a small piping company located in Topeka, Kansas, a city known as the largest producer of wheat in the United States. 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 estimates the additional earnings he can expect to retain and reinvest in the business. The firm's income statement for 2023 (current year) is shown below. The piping business has been growing rapidly over the past 18 months as the economy recovers from COVID-19, and the CFO estimates that sales will expand 10% in the next year. Depreciation expense will be $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: Cost of goods sold/sales 70% Operating expenses/sales 15% Tax rate 26% Estimate Harrison's net income for 2024 and its addition to retained earnings under the assumption that the firm leaves its dividends paid at the 2023 level. Given % Increase in sales COGS as % of Sales Tax Rate Operating Expenses Depreciation expense Interest Expense Dividends INCOME STATEMENT 2023 2024 Sales $1,500,000.00 Cost of goods sold $1,050,000.00 Gross profit $450,000.00 Operating cost $225,000.00 Depreciation expense $50,000.00 Net operating profit $175,000.00 Interest expense $10,000.00 Earnings before taxes $165,000.00 Taxes $42,000.00 Net income $107,000.00 Dividends $20,000.00 Addition to retained earning $87,000.00 7 Problem 17.3: In November of each year, the CFO of Harrison Piping begins the financial forecasting process to determine the firm's projected needs for new financing during the coming year. Harrison is a small piping company located in Topeka, Kansas, a city known as the largest producer of wheat in the United States. 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 estimates the additional earnings he can expect to retain and reinvest in the business. The firm's income statement for 2023 (current year) is shown below. The piping business has been growing rapidly over the past 18 months as the economy recovers from COVID-19, and the CFO estimates that sales will expand 10% in the next year. Depreciation expense will be $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: Cost of goods sold/sales 70% Operating expenses/sales 15% Tax rate 26% Estimate Harrison's net income for 2024 and its addition to retained earnings under the assumption that the firm leaves its dividends paid at the 2023 level. Given % Increase in sales COGS as % of Sales Tax Rate Operating Expenses Depreciation expense Interest Expense Dividends INCOME STATEMENT 2023 2024 Sales $1,500,000.00 Cost of goods sold $1,050,000.00 Gross profit $450,000.00 Operating cost $225,000.00 Depreciation expense $50,000.00 Net operating profit $175,000.00 Interest expense $10,000.00 Earnings before taxes $165,000.00 Taxes $42,000.00 Net income $107,000.00 Dividends $20,000.00 Addition to retained earning $87,000.00