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Ch02 P14 Build a Model

Spring 1, 2013
7/22/12
Chapter 2. Ch 02 P14 Build a Model
Except for charts and answers that must be written, only Excel formulas that use cell references or functions will be accepted for credit.
Numeric answers in cells will not be accepted.
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 2010
(Thousands of dollars)
Sales Revenue $455,000
Expenses (excluding depreciation) as a percent of sales 85.0%
Net fixed assest $67,000
Depr. as a % of net fixed assets 10.0%
Tax rate 40.0%
Interest expense $8,550
Dividend Payout Ratio 25%
Cumberland Industries: Income Statement (Thousands of dollars) 2010
Sales
Operating costs excluding depreciation
EBITDA
Depreciation (Cumberland has no amortization charges)
EBIT
Interest expense
EBT
Taxes (40%)
Net income
Common dividends
Addition to retained earnings
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)
2010 2009
Assets
Cash and cash equivalents $91,450 $74,625
Short-term investments 11,400 15,100
Accounts Receivable 108,470 85,527
Inventories 38,450 34,982
Total current assets $249,770 $210,234
Net fixed assets 67,000 42,436
Total assets $316,770 $252,670
Liabilities and equity
Accounts payable $30,761 $23,109
Accruals 30,405 22,656
Notes payable 12,717 14,217
Total current liabilities $73,883 $59,982
Long-term debt 80,263 63,914
Total liabilities $154,146 $123,896
Common stock $90,000
Retained earnings 38,774
Total common equity $128,774
Total liabilities and equity $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
Investing Activities
Cash used to acquire gross fixed assets
Due to change in short-term investments
Net cash provided (used) by investing activities
Financing Activities
Due to change in long-term debt

Mike Ehrhardt: An increase in debt is a positive cash flow.		 Due to change in notes payable

Mike Ehrhardt: An increase in debt is a positive cash flow.		 Due to change in common stock

Mike Ehrhardt: An increase in common stock is a positive cash flow.
Kenneth D. Jackson: An increase in accounts receivable from the pevious year to the current year reduces the net cash provided by operating activities
Kenneth D. Jackson: An increase in Inventory from the previous year to the current year reduces the net cash provided by operation activities
Mike Ehrhardt: An increase in accounts payable increases cash flow.
Mike Ehrhardt: An increase in accruals is a positive cash flow.
Christopher Buzzard: Remember, to calculate cash used to acquire fixed assets, we must include depreciation, i.e., assets purchased are equal to the increase in net assets plus depreciation.
Mike Ehrhardt: Selling securities is a positive cash flow, buying securities is a negative cash flow.		 Payment of common dividends
Net cash provided (used) by financing activities
Net increase/decrease in cash
Add: Cash balance at the beginning of the year
Cash balance at the end of the year
Check: cash balance in statement of cash flows should equal the cash on balance sheets as shown here:
$91,450

Sheet2

7/22/12