Ricardo Entertainment recently reported the following income statement: Sales 12,000,000 Cost of goods sold 7,500,000 EBIT 4,500,000 Interest 1,500,000 EBT 3,000,000 Taxes (40%) 1,200,000 Net income 1,800,000 The company’s CFO, Fred Mertz, wants to see a 25 percent increase in net income over the next year. In other words, his target for next year’s net income is $2,250,000. Mertz has made the following observations:  Ricardo’s operating margin (EBIT/Sales) was 37.5 percent this past year. Mertz expects that next year this margin will increase to 40 percent.  Ricardo’s interest expense is expected to remain constant.  Ricardo’s tax rate is expected to remain at 40 percent. On the basis of these numbers, what is the percentage increase in sales that Ricardo needs in order to meet Mertz’s target for net income?

Ricardo Entertainment recently reported the following income statement: Sales 12,000,000 Cost of goods sold 7,500,000 EBIT 4,500,000 Interest 1,500,000 EBT 3,000,000 Taxes (40%) 1,200,000 Net income 1,800,000 The company’s CFO, Fred Mertz, wants to see a 25 percent increase in net income over the next year. In other words, his target for next year’s net income is $2,250,000. Mertz has made the following observations:  Ricardo’s operating margin (EBIT/Sales) was 37.5 percent this past year. Mertz expects that next year this margin will increase to 40 percent.  Ricardo’s interest expense is expected to remain constant.  Ricardo’s tax rate is expected to remain at 40 percent. On the basis of these numbers, what is the percentage increase in sales that Ricardo needs in order to meet Mertz’s target for net income?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter4: Financial Planning And Forecasting

Section: Chapter Questions

Problem 7P

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