Chapter: 2

Problem: 14

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 2016

(Thousands of dollars)
Sales Revenue $945,000
Expenses (excluding depreciation) as a percent of sales 86.0%
Net fixed assest $330,750
Depr. And amortization $33,100.00
Tax rate 40.0%
Interest expense $10,470
Common Dividend $43,300.00 [1]

Cumberland Industries: Income Statement (Thousands of dollars 2016

Sales $945,000 [2]
Operating costs excluding depreciation $812,700 [3]
EBITDA $132,300 [4]
Depreciation and amortization $33,100 [5]
EBIT $99,200 [6]
Interest expense $10,470 [7]
EBT $88,730 [8]
Taxes (40%) $35,492 [9]
Net income $53,238 [10]

Common dividends $43,300.00 [11]

Addition to retained earnings $9,938 [12]
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) $15,000

Cumberland Industries December 31 Balance Sheets

(in thousands of dollars)
2016 2015
Assets
Cash and cash equivalents $47,250 $45,000
Short-term investments 3,800 3,600
Accounts Receivable 283,500 270,000
Inventories 141,750 135,000
Total current assets $476,300 $453,600
Net fixed assets 330,750 315,000
Total assets $807,050 $768,600

Liabilities and equity

Accounts payable $94,500 $90,000
Accruals 47,250 45,000
Notes payable 26,262 9,000
Total current liabilities $168,012 $144,000
Long-term debt 94,500 90,000
Total liabilities $262,512 $234,000
Common stock $444,600 [13] $444,600
Retained earnings 99,938 [14] 90,000
Total common equity $544,538 [15] $534,600
Total liabilities and equity $807,050 [16] $768,600

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)
2016
Operating Activities
Net Income $53,238 [17]
Adjustments:
Noncash adjustment:
Depreciation $33,100 [18]
Due to changes in working capital:
Due to change in accounts receivable $13,500 [19]
Due to change in inventories $6,750 [20]
Due to change in accounts payable $4,500 [21]
Due to change in accruals $2,250 [22]
Net cash provided (used) by operating activities $72,838 [23]

Investing Activities
Cash used to acquire gross fixed assets $48,850 [24]
Due to change in short-term investments $200 [25]
Net cash provided (used) by investing activities ($49,050) [26]

Financing Activities
Due to change in notes payable $17,262 [27]
Due to change in long-term debt $4,500 [28]
Due to change in common stock $0 [29]
Payment of common dividends $43,300 [30]
Net cash provided (used) by financing activities ($21,538) [31]

Net increase/decrease in cash $2,250 [32]

Add: Cash balance at the beginning of the year $45,000 [33]
Cash balance at the end of the year $47,250 [34]

Check: cash balance in statement of cash flows should equal the

cash on balance sheets as shown here: $47,250
Chapter: 2
Problem: 15

a. Using the financial statements shown below, calculate net operating working capital, total net
operating capital, net operating profit after taxes, free cash flow, and return on invested capital
for the most recent year.

Lan & Chen Technologies: Income Statements for Year Ending December 31
(Thousands of Dollars) 2016 2015
Sales $945,000 $900,000
Expenses excluding depreciation and amortization 812,700 774,000
EBITDA $132,300 $126,000
Depreciation and amortization 33,100 31,500
EBIT $99,200 $94,500
Interest Expense 10,470 8,600
EBT $88,730 $85,900
Taxes (40%) 35,492 34,360
Net income $53,238 $51,540

Common dividends $43,300 $41,230

Addition to retained earnings $9,938 $10,310

Lan & Chen Technologies: December 31 Balance Sheets

(Thousands of Dollars)
Assets 2016 2015
Cash and cash equivalents $47,250 $45,000
Short-term investments 3,800 3,600
Accounts Receivable 283,500 270,000
Inventories 141,750 135,000
Total current assets $476,300 $453,600
Net fixed assets 330,750 315,000
Total assets $807,050 $768,600

Liabilities and equity

Accounts payable $94,500 $90,000
Accruals 47,250 45,000
Notes payable 26,262 9,000
 Total current liabilities $168,012 $144,000
Long-term debt 94,500 90,000
Total liabilities $262,512 $234,000
Common stock 444,600 444,600
Retained Earnings 99,938 90,000
Total common equity $544,538 $534,600
Total liabilities and equity $807,050 $768,600

Key Input Data

Tax rate 40%

Net operating working capital

Operating Operating
current current
2016 NOWC = assets - liabilities
2016 NOWC = $472,500 [35] - $141,750 [36]
2016 NOWC = $330,750 [37]

Operating Operating
current current
2015 NOWC = assets - liabilities
2015 NOWC = $450,000 [38] - $135,000 [39]
2015 NOWC = $315,000 [40]

Total net operating capital

2016 TOC = NOWC + Fixed assets
2016 TOC = $330,750 [41] + $330,750 [42]
2016 TOC = $661,500 [43]

2015 TOC = NOWC + Fixed assets

2015 TOC = $315,000 [44] + $315,000 [45]
2015 TOC = $630,000 [46]

Investment in total net operating capital

2016 2015
2016 nv. In TOC = TOC - TOC
2016 nv. In TOC = $661,500 [47] - $630,000 [48]
2016 nv. In TOC = $31,500 [49]
Net operating profit after taxes
2016 NOPAT = EBIT x (1-T)
2016 NOPAT = $99,200 [50] x 60% [51]
2016 NOPAT = $59,520 [52]

Free cash flow

2016 FCF = NOPAT - Net investment in operating capital
2016 FCF = $59,520 [53] - $31,500 [54]
2016 FCF = $28,020 [55]

Return on invested capital

2016 ROIC = NOPAT / Total net operating capital
2016 ROIC = $59,520 [56] / $661,500 [57]
2016 ROIC = 9.0% [58]

b. Assume that there were 15 million shares outstanding at the end of the year, the year-end
closing stock price was $65 per share, and the after-tax cost of capital was 8%. Calculate EVA
and MVA for the most recent year.

Additional Input Data

Stock price per share $65.00
# of shares (in thousands) 15,000
After-tax cost of capital 8.0%

Market Value Added

MVA = Stock price x # of shares - Total common equity
MVA = $65.00 [59] x 15,000 [60] - $544,538 [61]
MVA = $975,000 [62] - $544,538 [63]
MVA = $430,462 [64]

Economic Value Added

EVA = NOPAT - (Operating Capita x After-tax cost of capital)
EVA = $59,520 [65] - $661,500 [66] x 8% [67]
EVA = $59,520 [68] - $52,920 [69]
EVA = $6,600 [70]
[1] Sadaqat:
Given in question.

[2] Sadaqat:
Given in questiom information.

[3] Sadaqat:
By multiplying expenses as a percent of sales with sales revenue.

[4] Sadaqat:
By deducting opeating cost from sales.

[5] Sadaqat:
As given in question info.

[6] Sadaqat:
By deducting depriciation from EBITDA.

[7] Sadaqat:
As given in question information.

[8] Sadaqat:
By deducting interest expense from EBIT.

[9] Sadaqat:
By multiplying tax percentage with EBT.

[10] Sadaqat:
By subtracting taxes from EBT.

[11] Sadaqat:
As given in question info.

[12] Sadaqat:
By subtracting common dividends from net income.

[13] Sadaqat:
As given in question info.

[14] Sadaqat:
As given in question info.

[15] Sadaqat:
By adding Common stock and retained earnings.

[16] Sadaqat:
By adding total liabilities and total equity.

[17] Sadaqat:
we find it in upper part.

[18] Sadaqat:
we find it in upper part.

[19] Sadaqat:
Change in the receiveables of 2015 and 2016.

[20] Sadaqat:
Change in the inventories of 2015 and 2016.

[21] Sadaqat:
Change in the account payables of 2015 and 2016.

[22] Sadaqat:
Change in the accruals of 2015 and 2016.

[23] Sadaqat:
By adding cash inflows which is change in receiveables and inventories and by deducting cash outflows which is change in account paybles and accruals.

[24] Sadaqat:
net change in the fixed assets of 2015 and 2016 and add depriciation in it

[25] Sadaqat:
change in shortterm investment of 2015 and 2016.

[26] Sadaqat:
By adding negative net gross fixed assets with negative shortterm ivestments.
[27] Sadaqat:
Net Change in the payables of 2015 and 2016

[28] Sadaqat:
Net Change in the long term debt of 2015 and 2016

[29] Sadaqat:
Net Change in the common stocks of 2015 and 2016

[30] Sadaqat:
we find
in the upper part.

[31] Sadaqat:
By adding cash inflows which is payables,long term debt and common stock and deducting cash outflows which is common dividends.

[32] Sadaqat:
By adding total operating , investing and financing activities,

[33] Sadaqat:
2015 ending balance.

[34] Sadaqat:
By adding net cash and beginning cash of the year.

[35] Sadaqat:
operation current aseets includes cash,receiveables and iinventories because we use them in day to day activities.

[36] Sadaqat:
it includes account payables and accruals.

[37] Sadaqat:
diffrence between operating current assets and operating current liabilities.

[38] Sadaqat:
operation current aseets includes cash,receiveables and iinventories because we use them in day to day activities.

[39] Sadaqat:
it includes account payables and accruals.
[40] Sadaqat:
diffrence between operating current assets and operating current liabilities.

[41] Sadaqat:
find in upper part

[42] Sadaqat:
given in balance sheet

[43] Sadaqat:
By adding NOWC and fixed assets

[44] Sadaqat:
Find in upper part

[45] Sadaqat:
Given in Balance Sheeet

[46] Sadaqat:
By adding NOWC and fixed assets

[47] Sadaqat:
Find TOC in upper part.

[48] Sadaqat:
Find TOC in upper part.

[49] Sadaqat:
Difference between in the TOC's of 2015 and 2016.

[50] Sadaqat:
Given in Income Statement

[51] Sadaqat:
Given in Question Data

[52] Sadaqat:
By multiplying EBIT with Tax rate.
[53] Sadaqat:
we find in upper part.

[54] Sadaqat:
we find in upper part.

[55] Sadaqat:
Nopat minus Net investment in operating capital.

[56] Sadaqat:
we find in upper part.

[57] Sadaqat:
we find in upper part.

[58] Sadaqat:
by dividing NOPat with Total Net operating capital.

[59] Sadaqat:
given in question.

[60] Sadaqat:
given in question.

[61] Sadaqat:
Given in Income Statement.

[62] Sadaqat:
By multiplying stock price with no of shares.

[63] Sadaqat:
Given in Income statement.

[64] Sadaqat:
by subtracting total common equity from market value added.

[65] Sadaqat:
we find in upper part.

[66] Sadaqat:
we find in upper part.

[67] Sadaqat:
given in question.

[68] Sadaqat:
we finf it in upper part.

[69] Sadaqat:
by multiplying working capital with given after tax cost of capital.

[70] Sadaqat:
by subtracting operating capital into after tax from NOPAt