Gold-Jerry Gold Corporation is a mid-tier gold producer listed on the New York Stock Exchange. It is currently the end of Year 1, and the fiscal situation in the U.S and Europe is dire. Kenny Bania, an analyst at Gold-Jerry, forecasts that gold prices will rise during Year 2, since gold is regarded as a safe investment haven during periods of economic uncertainty. Bania is forecasting that Gold-Jerry's revenues will increase by 25% in Year 2. Use the data in the table to estimate Gold-Jerry's operating profit margin (EBIT/Sales)for Year 2. $$\begin{array} { | c | c | c | }
\hline \begin{array} { c }
\text { Gold-Jerry } \
\text { Gold Corp. } \
( \$ 000 \text { s } )
\end{array} & & \
\hline & \text { Year 1 (Actual) } & \begin{array} { l }
\text { Year 2 } \
\text { Forecast) }
\end{array} \
\hline \text { Sales } & \$ 12,000 & \$ 15,000 \
\hline \text { EBIT } & \$ 500 & \
\hline \begin{array} { c }
\text { Operating } \
\text { Profit Margin }
\end{array} & 4.17 \% & \
\hline \begin{array} { c }
\text { Operating } \
\text { Leverage }
\end{array} & 1.65 & \
\hline
\end{array}$$

Question

Gold-Jerry Gold Corporation is a mid-tier gold producer listed on the New York Stock Exchange. It is currently the end of Year 1, and the fiscal situation in the U.S and Europe is dire. Kenny Bania, an analyst at Gold-Jerry, forecasts that gold prices will rise during Year 2, since gold is regarded as a safe investment haven during periods of economic uncertainty. Bania is forecasting that Gold-Jerry's revenues will increase by 25% in Year 2. Use the data in the table to estimate Gold-Jerry's operating profit margin (EBIT/Sales)for Year 2. $$\begin{array} { | c | c | c | } 
\hline \begin{array} { c } 
\text { Gold-Jerry } \
\text { Gold Corp. } \
( \$ 000 \text { s } )
\end{array} & & \
\hline & \text { Year 1 (Actual) } & \begin{array} { l } 
\text { Year 2 } \
\text { Forecast) }
\end{array} \
\hline \text { Sales } & \$ 12,000 & \$ 15,000 \
\hline \text { EBIT } & \$ 500 & \
\hline \begin{array} { c } 
\text { Operating } \
\text { Profit Margin }
\end{array} & 4.17 \% & \
\hline \begin{array} { c } 
\text { Operating } \
\text { Leverage }
\end{array} & 1.65 & \
\hline
\end{array}$$

Quizplus · Accepted Answer

The operating profit margin for Year 2 can be calculated by first estimating the EBIT for Year 2. Given that sales are forecasted to increase by 25% from $12,000 to $15,000, and using the operating leverage of 1.65, the percentage increase in EBIT can be calculated as 25% * 1.65 = 41.25%. The Year 1 EBIT is $500, so the Year 2 EBIT is $500 * (1 + 0.4125) = $706.25. The operating profit margin for Year 2 is then $706.25 / $15,000 = 4.71%.

Gold-Jerry Gold Corporation Is a Mid-Tier Gold Producer Listed on the New