Chapter 3. Ch 03-14 Build a Model Here are the balance sheets as given in the problem: Cumberland Industries December 31 Balance Sheets (in thousands of dollars) 2007 2006 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 Net 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 2007 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 2007 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% 2007 2006 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, 2007, and then its 2007 statement of cash flows. Statement of Retained Earnings (in thousands of dollars) Balance of Retained Earnings, December 31, 2006 Add: Net Income, 2007 Less: Common dividends paid, 2007 Balance of Retained Earnings, December 31, 2007 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 Investing Activities Cash used to acquire gross fixed assets Decrease in short-term investments Net cash provided by investing activities Financing Activities 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 2007. Net Operating Working Capital NOWC07 = Operating current assets - Operating current liabilities = = NOWC06 = Operating current assets - Operating current liabilities = = Total Net Operating Capital TOC07 = NOWC + Fixed assets = + = TOC06 = NOWC + Fixed assets = + = Net Operating Profit After Taxes NOPAT07 = EBIT x ( 1 - T ) = x = Operating Cash Flow OCF07 = NOPAT + Depreciation = + = Free Cash Flow FCF07 = OCF - Gross investment in operating capital = - = or FCF07 = NOPAT - Net investment in operating capital = - = d. Calculate the firm?s EVA and MVA for 2007. 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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