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    Cumberland Industries

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    See attached file for full problem description.
    Here are the balance sheets as given in the problem:

    Cumberland Industries December 31 Balance Sheets
    (in thousands of dollars)
    Year 2 Year 1
    Assets
    Cash and cash equivalents $91,450 $74,625
    Short-term investments $11,400 $15,100
    Accounts Receivable $103,365 $85,527
    Inventories $38,444 $34,982
    Total current assets $244,659 $210,234
    Fixed assets $67,165 $42,436
    Total assets $311,824 $252,670

    Liabilities and equity
    Accounts payable $30,761 $23,109
    Accruals $30,477 $22,656
    Notes payable $16,717 $14,217
    Total current liabilities $77,955 $59,982
    Long-term debt $76,264 $63,914
    Total liabilities $154,219 $123,896
    Common stock $100,000 $90,000
    Retained Earnings $57,605 $38,774
    Total common equity $157,605 $128,774
    Total liabilities and equity $311,824 $252,670

    a. The company's Year 2 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 Year 2 income statement.

    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

    Sales Revenue $455,150
    EBITDA as a percent of sales 15%
    Depr. as a % of Fixed Assets 11%
    Tax rate 40%
    Interest Expense $8,575
    Dividend Payout Ratio 40%

    Year 2 Year 1
    Sales $364,120
    Expenses excluding depreciation and amortization $321,109
    EBITDA $43,011
    Depreciation (Cumberland has no amortization charges) $6,752
    EBIT $36,259
    Interest Expense $7,829
    EBT $28,430
    Taxes (40%) $11,372
    Net Income $17,058

    Common dividends $6,823
    Addition to retained earnings $10,235

    b. Next, construct the firm's statement of retained earnings for the year ending December 31, Year 2, and
    then its Year 2 statement of cash flows.

    Statement of Retained Earnings
    (in thousands of dollars)

    Balance of Retained Earnings, December 31, Year 1 (2 points)
    Add: Net Income, Year 2
    Less: Common dividends paid, Year 2
    Balance of Retained Earnings, December 31, Year 2

    Statement of Cash Flows
    (in thousands of dollars)

    Operating Activities (5 points)
    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

    Investing Activities (2 points)
    Cash used to acquire fixed assets

    Financing Activities (3 points)
    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

    c. Calculate net operating working capital, total net operating capital, net operating profit after taxes, operating
    cash flow, and free cash flow for Year 2.

    Net Operating Working Capital
    NOWC04 = Operating current assets - Operating current liabilities
    = (2 points)
    =

    NOWC03 = Operating current assets - Operating current liabilities
    = (2 points)
    =

    Total Net Operating Capital
    TOC04 = NOWC + Fixed assets
    = + (2 points)
    =

    TOC03 = NOWC + Fixed assets
    = + (2 points)
    =

    Net Operating Profit After Taxes
    NOPAT04 = EBIT x ( 1 - T )
    = x (2 points)
    =

    Operating Cash Flow
    OCF04 = NOPAT + Depreciation
    = + (2 points)
    =

    Free Cash Flow
    FCF04 = OCF - Gross investment in operating capital
    = - (2 points)
    =

    or

    FCF04 = NOPAT - Net investment in operating capital
    = -
    =

    d. Calculate the firm's EVA and MVA for Year 2. 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 $17.25
    # of shares (in thousands) 10,000
    A-T cost of capital 12%

    Market Value Added
    MVA = Stock price x # of shares - Total common equity
    = x -
    =

    Economic Value Added
    EVA = NOPAT - Operating Capital x After-tax cost of capital
    = - x
    =

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    https://brainmass.com/business/finance/cumberland-industries-98828

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    Solution Summary

    The solution explains how to prepare the income statement, statement of cash flows and other calculations for Cumberland Industries.

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