4/6/2004
Chapter 3. Solution for Ch 3-2
Cumberland Industries December 31 Balance Sheets
(in thousands of dollars)
20x4
20x3
Assets
Cash and cash equivalents
Short-term investments
Accounts Receivable
Inventories
Total current assets
Fixed assets
Total assets
$91,450
$11,400
$103,365
$38,444
$244,659
$67,165
$311,824
$74,625
$15,100
$85,527
$34,982
$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
$30,477
$16,717
$77,955
$76,264
$154,219
$100,000
$57,605
$157,605
$311,824
$23,109
$22,656
$14,217
$59,982
$63,914
$123,896
$90,000
$38,774
$128,774
$252,670
a. The company’s 20x4 sales were $455,150,000, and EBITDA was 15 percent of sales. Furthermore,
depreciation amounted to 11 percent of net fixed assets, interest charges were $8,575,000, the
state-plus-federal corporate tax rate was 40 percent, and Cumberland pays 40 percent of its net income
out in dividends. Given this information, construct Cumberland's 20x4 income statement.
Key Input Data for Cumberland Industries
Sales Revenue
EBITDA as a percent of sales
Depr. as a % of Fixed Assets
Tax rate
Interest Expense
Dividend Payout Ratio
$455,150
15%
11%
40%
$8,575
40%
Sales
Expenses excluding depreciation and amortization
EBITDA
Depreciation (Cumberland has no amortization charges)
EBIT
Interest Expense
20x4
$455,150
$386,878
$68,273
$7,388
$60,884
$8,575
(in thousands of dollars)
20x3
$364,120
$321,109
$43,011
$6,752
$36,259
$7,829
EBT
Taxes (40%)
Net Income
$52,309
$20,924
$31,386
$28,430
$11,372
$17,058
Common dividends
Addition to retained earnings
$12,554
$18,831
$6,823
$10,235
b. Next, construct the firm’s statement of retained earnings for the year ending December 31, 20x4, and
then its 20x4 statement of cash flows.
Statement of Cash Flows
(in thousands of dollars)
Operating Activities
Net Income
Adjustments:
Noncash adjustment:
Depreciation
Due to changes in working capital:
Increase in accounts receivable
Increase in inventories
Increase in accounts payable
Increase in accruals
Net cash provided by operating activities
-$17,838
-$3,462
$7,652
$7,821
$32,947
Investing Activities
Cash used to acquire fixed assets
-$32,117
Financing Activities
Decrease in short-term investments
Increase in notes payable
Increase in long-term debt
Increase in common stock
Payment of common dividends
Net cash provided 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
$3,700
$2,500
$12,350
$10,000
-$12,554
$15,995
$16,825
$74,625
$91,450
$31,386
$7,388
c. Calculate net operating working capital, total net operating capital, net operating profit after taxes, operating
cash flow, and free cash flow for 20x4.
Net Operating Working Capital
NOWCx4 =
=
=
Operating
current assets
$233,259
$172,021
-
Operating
current
liabilities
$61,238
NOWCx3 =
=
=
Operating
current assets
$195,134
$149,369
Total Net Operating Capital
TOCx4 =
NOWC
=
$172,021
=
$239,186
Operating
current
liabilities
$45,765
-
+
+
Fixed assets
$67,165
+
+
Fixed assets
$42,436
Net Operating Profit After Taxes
NOPATx4 =
EBIT
=
$60,884
=
$36,531
x
x
(1-T)
60%
Operating Cash Flow
OCFx4 =
NOPAT
=
$36,531
=
$43,919
+
+
Depreciation
$7,388
TOCx3 =
=
=
NOWC
$149,369
$191,805
d. Calculate the firm’s EVA and MVA for 20x4. Assume that Cumberland had 10 million shares outstanding, that
the year-end closing stock price was $17.25 per share, and its after-tax cost of capital was 12 percent.
Additional Input Data
Stock price
# of shares (in thousands)
A-T cost of capital
$17.25
10,000
12%
Market Value Added
MVA =
Stock price
=
$17.25
=
$14,895
x
x
# of shares
10,000
-
Total common equity
$157,605
Economic Value Added
EVA =
NOPAT
=
$36,531
=
$7,828
-
Operating Capital
$239,186
x
x
After-tax cost of capital
12%