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a. Britton String Corp. manufactures specialty strings for musical instruments and tennis racquets. Its most recent sales were $880 million; operating costs (excluding depreciation) were equal to 85% of sales; net fixed assets were $300 million; depreciation amounted to 10% of net fixed assets; interest expenses were $22 million; the state-plus-federal corporate tax rate was 25%; and it paid 40% of its net income out in dividends. Given this information, construct its income statement. Also calculate total dividends and the addition to retained earnings. Report all dollar figures in millions.

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Answer:

Britton String Corp reported Net Income of $60 Million, out of which $24 Million were paid paid out in dividends and $36 Million were taken as addition to Retained Earnings.

Income Statement of the company is presented below. Please note that:

  • All figures are reported in dollar in millions
  • Figures in brackets represent negative figure
  • Excel solution is attached for your reference

Explanation:

                                                   Britton String Corp.

                                                    Income Statement

Sales                                                                            $880  

Less: Operating Costs (Sales × 85%)                             ($748)

Earning before Interest, Tax,

Depreciation & Amortization (EBITDA)                     $132  

 

Less: Depreciation (Net Fixed Assets × 10%)                 $(30)

 

Earnings before Interest and Tax (EBIT)                      $102  

 

Less: Interest Expense                                                      $(22)

 

Earnings before Tax (EBT)                                              $80  

 

Corporate Tax (EBT × 25%)                                               $(20)

 

Net Income                                                                       $60  

Payment of Dividends (Net Income × 40%)                    $24  

Addition to Retained Earnings

(Net Income – Dividends paid)                                         $36

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