Assume U.S. GAAP (generally accepted accounting principles) applies unless otherwise noted. Kim Lee, CFA, is trying to forecast net income for Robinson’s Ltd, a chain of retail furniture outlets. He has prepared the following common sized data from their recent annual report and has estimated sales for 2008 using a forecasting model his firm developed for consumer goods. 2007 2006 actual actual 2,150 1,990 Sales millions 100.00% 100.00% Sales as % of sales 45.00% 45.00% Cost of goods sold 40.00% 40.00% Operating expenses 3.72% 4.02% Interest expense 0% 7.20% Restructuring expense 11.28% 3.78% Pre-tax margin 3.95% 1.32% Taxes (35%) 7.33% 2.46% Net income 2008 Sales forcasted is 2250. The capital structure of the company has not changed. The projected net income (in millions) for 2008 is closest to: A. 110.1. B. 162.8. C. 164.9. D. 167.4.

Anyone??? Sorry for bad format…

D

The only thing you need to know for this is that your interest expense will decrease by the same % that your Sales increase from 2007 and 2008. Straight forward.

Didn’t get you… Can you explain pls??

What’s the logic behind this one? and can someone show us how this is calculated? because I got 169 based on Alexandrov’s tip.

Yes, Can someone explain with calculation please…

Check the /interest expense for each of the years 2006 and 2007, although they are different as % of sales, in amount the numbers are exactly the same. That’s the trick with this question. Year 2008 net income= 2250 (1-45%-40%)=EBIT=337.5 Deduct interest expense = EBIT-I=337.5-3.72*2150= EBT=257.52 NI=EBT(1-tax rate)=167.388~167.4, that’s D

You can figure out all the numbers until you get to interest expense. Then you have to notice that interest expense has been fixed at $80 each year. Use $80MM again vs. trying to figure out the percentage and work on down the line. 1990M (4.02%) = 80m 2150M (3.72%) = 80M

Here is what I saw, and how I dealt with it: Everything moves lock step with sales, except interest. Interest is fixed, everything else is driven by sales, except taxes which is driven by pretax income, so… 1) 2007 interest in dollars / 2008 sales = 2008 interest ratio 2) (2007 interest ratio - 2008 interest ratio)+2007 pretax margin ratio = 2008 pretax margin ratio 3) 2008 pretax margin ratio * (1- tax rate) = 2008 net income ratio 4) 2008 net income ratio * Sales forecast = 2008 Net Income 1) (3.72% * $2150) / $2250 = 3.55% 2) (3.72% - 3.55%) + 11.28% = 11.45% 3) 11.45% * (1-35%) = 7.44% 4) 7.44% * $2250 = $167