Chapter 7.

Student Ch 7-14 Build a Model

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 2012

(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 dollar 2012

Sales $455,000
Operating costs excluding depreciation $386,750
EBITDA $68,250
Depreciation (Cumberland has no amortization charges) $6,700
EBIT $61,550
Interest expense $8,550
EBT $53,000
Taxes (40%) $21,200
Net income $31,800

Common dividends $7,950

Addition to retained earnings $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)
2012 2011
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 $100,000 $90,000
Retained earnings 62,624 38,774
Total common equity $162,624 $128,774
Total liabilities and equity $316,770 $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 $31,800
Adjustments:
Noncash adjustment:
Depreciation $6,700
Due to changes in working capital:
Due to change in accounts receivable $22,943
Due to change in inventories $3,468
Due to change in accounts payable $7,652
Due to change in accruals $7,749
Net cash provided (used) by operating activities $27,490

Investing Activities
Cash used to acquire gross fixed assets $31,264
Due to change in short-term investments $3,700
Net cash provided (used) by investing activities ($27,564)

Financing Activities
Due to change in notes payable ($1,500)
Due to change in long-term debt $16,349
Due to change in common stock $10,000
Payment of common dividends $7,950
Net cash provided (used) by financing activities $16,899
Net increase/decrease in cash $16,825
Add: Cash balance at the beginning of the year $74,625
Cash balance at the end of the year $91,450
 2/1/2012

excluding depreciation)
nted to 10% of net fixed
e was 40% and
construct Cumberland's
ings.

below. Using this data

sued $10,000,000 of new

m part a, fill in the
tal liabilities and equity.