Solution to Ch02 P14 Build a Model.xls

Chapter 2. Solution for 2-14 a. Cumberland Industries' most recent sales were $455,000,000; operating costs (excluding depreciation) were equal to 85% of sales; net fixed assets were $67,000,000; depreciation amounted to 10% of net fixed assets; interest expenses were $8,550,000; the state-plus-federal corporate tax rate was 40% and Cumberland paid 25% of its net income out in dividends. Given this information, construct Cumberland's income statement. Also calculate total dividends and the addition to retained earnings. The input information required for the problem is outlined in the "Key Input Data" section below. Using this data and the balance sheet above, we constructed the income statement shown below. Key Input Data for Cumberland Industries (Thousands of dollars) Sales Revenue Expenses (excluding depreciation) as a percent of sales Net fixed assest Depr. as a % of net fixed assets Tax rate Interest expense Dividend Payout Ratio

$455,000 85.0% $67,000 10.0% 40.0% $8,550 25%

Cumberland Industries: Income Statement (Thousands of dollars) Sales Operating costs excluding depreciation EBITDA Depreciation (Cumberland has no amortization charges) EBIT Interest expense EBT Taxes (40%) Net income

2010 $455,000 $386,750 $68,250 $6,700 $61,550 $8,550 $53,000 $21,200 $31,800

Common dividends Addition to retained earnings

2010

$7,950 $23,850

b. Cumberland Industries' partial balance sheets are shown below. Cumberland issued $10,000,000 of new common stock in the most recent year. Using this information and the results from part a, fill in the missing values for common stock, retained earnings, total common equity, and total liabilities and equity. Dollar value of common stock issued (in thousands of dollars)

$10,000

Cumberland Industries December 31 Balance Sheets (in thousands of dollars) Assets Cash and cash equivalents Short-term investments Accounts Receivable Inventories

2010

2009

$91,450 11,400 108,470 38,450

$74,625 15,100 85,527 34,982

Total current assets Net fixed assets Total assets

$249,770 67,000 $316,770

$210,234 42,436 $252,670

Liabilities and equity Accounts payable Accruals Notes payable Total current liabilities Long-term debt Total liabilities Common stock Retained earnings Total common equity Total liabilities and equity

$30,761 30,405 12,717 $73,883 80,263 $154,146 $100,000 62,624 $162,624 $316,770

$23,109 22,656 14,217 $59,982 63,914 $123,896 $90,000 38,774 $128,774 $252,670

Check for balancing (this should be zero): c. Construct the statement of cash flows for the most recent year. Statement of Cash Flows (in thousands of dollars) Operating Activities Net Income Adjustments: Noncash adjustment: Depreciation Due to changes in working capital: Due to change in accounts receivable Due to change in inventories Due to change in accounts payable Due to change in accruals Net cash provided (used) by operating activities

($22,943) ($3,468) $7,652 $7,749 $27,490

Investing Activities Cash used to acquire gross fixed assets Due to change in short-term investments Net cash provided (used) by investing activities

($31,264) $3,700 ($27,564)

Financing Activities Due to change in notes payable Due to change in long-term debt Due to change in common stock Payment of common dividends Net cash provided (used) by financing activities

($1,500) $16,349 $10,000 ($7,950) $16,899

Net increase/decrease in cash Add: Cash balance at the beginning of the year Cash balance at the end of the year

$16,825 $74,625 $91,450

$31,800

$6,700

4/11/2010

depreciation) were equal to assets; interest expenses 25% of its net income out in te total dividends and the

. Using this data and the

,000,000 of new common missing values for common