Cumberland Industries

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
=