12/15/2012

NAME: ___________________________ REGISTRATION NO: ________________________

FINANCIAL MANAGEMNET ASSIGNMENT NO 1

Cumberland Industries

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 $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 2012 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 corporate tax rate
was 40 percent, and Cumberland pays 40 percent of its net income out in dividends. Given this information,
construct Cumberland's 2012 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

(In thousand of dollars)
Sales Revenue 455150
EBITDA as a percent of sales 15% of sales
Depr. as a % of Fixed Assets 11% of net fixed ssets
Tax rate 40%
Interest Expense 8575
Dividend Payout Ratio 40% of net income

2012 2011
Sales $455,150 $364,120
Expenses excluding depreciation and amortization $386,878 $321,109
EBITDA $68,272 $43,011
Depreciation (Cumberland has no amortization charges) $7,388 $6,752
EBIT $60,884 $36,259
Interest Expense $8,575 $7,829
EBT $52,309 $28,430
Taxes (40%) ### $11,372
Net Income $31,385 $17,058

Common dividends $12,554.16 $6,823

Addition to retained earnings $18,831 $10,235

b. Next, construct the firm’s statement of shareholder equity for the year ending December 31,
2012, and then its 2012 statement of cash flows.

Statement of Retained Earnings

(in thousands of dollars)

Balance of Retained Earnings, December 31, 2011 $38,774

Add: Net Income, 2012 $31,385
Less: Common dividends paid, 2012 ($12,554)
Balance of Retained Earnings, December 31, 2012 $57,605

Statement of Stockholders' Equity, December 31, 2012

(in thousands of dollars)
Retained
Common stock Earnings Total Equity

Balance December 31, 2011 $90,000 $38,774 $128,774

Net Income $31,385 $18,831
Cash Dividends ($12,554)
Issuance of Common Stock $10,000 $10,000
Balalnce December 31, 2012 $100,000 $57,605 $157,605

Statement of Cash Flows

(in thousands of dollars)

Operating Activities
Net Income $31,385
Adjustments:
Noncash adjustment:
Depreciation $7,388
Due to changes in working capital:
Increase in accounts receivable ($17,838)
Increase in inventories ($3,462)
 Increase in accounts payable $7,652
Increase in accruals $7,821
Net cash provided by operating activities $32,946

Investing Activities
Cash used to acquire gross fixed assets ($32,117)
Decrease in short-term investments $3,700
Net cash provided by investing activities ($28,417)

Financing Activities
Increase in notes payable $2,500
Increase in long-term debt $12,350
Increase in common stock $10,000
Payment of common dividends ($12,554)
Net cash provided by financing activities $12,295
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

c. Calculate net operating working capital, total net operating capital, net operating profit after taxes,
operating cash flow, and free cash flow for 2012.

Net Operating Working Capital

Operating
Operating current
NOWC12= current assets - liabilities
= $233,259 $61,238
= $172,021

Operating
Operating current
NOWC11 = current assets - liabilities
= $195,134 $45,765
= $149,369

Total Net Operating Capital

TOC12 = NOWC + Fixed assets
= $172,021 + $67,165
= $239,186

TOC11 = NOWC + Fixed assets

= $149,369 + $42,436
= $191,805

Net Operating Profit After Taxes

NOPAT12 = EBIT x (1-T)
= $60,884 x 60%
= $36,530.40
Operating Cash Flow
OCF12 = NOPAT + Depreciation
= $36,530 + $7,388
= $43,918

Free Cash Flow

FCF12 = OCF - Gross investment in operating capital
= $43,918 - $54,769
= -$10,851

or

FCF12 = NOPAT - Net investment in operating capital

= $36,530 - $47,381
= -$10,851

d. Calculate the firm’s EVA and MVA for 2012. 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 (WACC)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
= $17.25 x 10,000 - $157,605
= $14,895

Economic Value Added

EVA = NOPAT - Operating Capital x After-tax cost of capital
= $36,530 - $239,186 x 12%
= $7,828.08
Cumberland Industries' December 31 Balance Sheets
(in thousands of dollars)

Assets 2012 2011

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

Cumberland Industries December 31 Income Statements

(in thousands of dollars)
2012 2011
Sales $455,150 $364,120
Expenses excluding depr. and amort. $386,878 $321,109
EBITDA $68,272 $43,011
Depreciation and Amortization $7,388 $6,752
EBIT $60,884 $36,259
Interest Expense $8,575 $7,829
EBT $52,309 $28,430
Taxes (40%) $20,924 $11,372
Net Income $31,385 $17,058

Common dividends $12,554 $6,823

Addition to retained earnings $18,831 $10,235

Other Data 2012 2011

Year-end Stock Price $17.25 $14.75
# of shares (in thousands) 10,000 9,000
Lease payment $75,000 $75,000
Sinking fund payment $0 $0
Tax rate 40% 40%
 PERFORM RATIO ANALYSIS FOR 2011 & 2012
Ratio Analysis 2012 2011 Industry Avg
Liquidity Ratios
Current Ratio 3.14 3.50 N
Quick Ratio 2.65 2.92 O
Asset Management Ratios T
Inventory Turnover 11.84 10.41
Days Sales Outstanding 82.89 85.73 A
Fixed Assets Turnover 6.78 8.58 V
Total Assets Turnover 1.46 1.44 A
Debt Management Ratios I
Debt Ratio 49.46% 49.03% L
Times-interest-earned ratio 7.10 4.63 A
EBITDA coverage ratio 1.71 1.42 B
Profitability Ratios L
Profit Margin 6.90% 4.68% E
Basic Earning Power 19.53% 14.35%
Return on Assets 10.07% 6.75%
Return on Equity 19.91% 13.25%
Market Value Ratios
Earnings per share $3.14 $1.90
Price-to-earnings ratio 5.50 7.78
Cash flow per share $3.88 $2.65
Price-to-cash flow ratio 4.45 5.58
Book Value per share $15.76 $14.31
Market-to-book ratio 1.09 1.03

a. Has Cumberland's liquidity position improved or worsened? Explain.

the current ratio and quick ratio hass dereased, hence company's liquidity position is poor.

b. Has Cumberland's ability to manage its assets improved or worsened? Explain.

since inventory turnover ratio and days sales outstanding have incrased, reflecting good asset management
but total fixed turnover ratio has lessen. Hence connclusion can not be drawn.

c. How has Cumberland's profitability changed during the last year?

DuPoint anaysis indicates that company's profitibility has signficantly increased over a year.

d. Perform an extended Du Pont analysis for Cumberland for 2011 and 2012.
ROE = PM x TA Turnover x Equity Multiplier
2012 19.91% 6.90% 1.46 1.98
2011 13.25% 4.68% 1.44 1.96

since profit margin has inceased as compared to total assets and equity multiplier.
So it has improved return over equity in 2012
e. Perform a common size analysis. What has happened to the composition
(that is, percentage in each category) of assets and liabilities?

Common Size Balance Sheets

Assets 2012 2011
Cash and cash equivalents 29.3% 29.5%
Short-term investments 3.7% 6.0%
Accounts Receivable 33.1% 33.8%
Inventories 12.3% 13.8%
Total current assets 78.5% 83.2%
Net fixed assets 21.5% 16.8%
Total assets 100.0% 100.0%

Liabilities and equity 2012 2011

Accounts payable 9.9% 9.1%
Accruals 9.8% 9.0%
Notes payable 5.4% 5.6%
Total current liabilities 25.0% 23.7%
Long-term debt 24.5% 25.3%
Total liabilities 49.5% 49.0%
Common stock 32.1% 35.6%
Retained Earnings 18.5% 15.3%
Total common equity 50.5% 51.0%
Total liabilities and equity 100.0% 100.0%

Common Size Income Statements 2012 2011

Sales 100.0% 100.0%
Expenses excluding depr. and amort. 85.0% 88.2%
EBITDA 15.0% 11.8%
Depreciation and Amortization 1.6% 1.9%
EBIT 13.4% 10.0%
Interest Expense 1.9% 2.2%
EBT 11.5% 7.8%
Taxes (40%) 4.6% 3.1%
Net Income 6.9% 4.7%

this common size analysis indicates that there is no significant

change in assets but expenses have lowered in 2012

f. Perform a percent change analysis. What does this tell you about the change in profitability
and asset utilization?

Percent Change Balance Sheets Base

Assets 2012 2011
Cash and cash equivalents 22.5% 0.0%
Short-term investments -24.5% 0.0%
Accounts Receivable 20.9% 0.0%
Inventories 9.9% 0.0%
Total current assets 16.4% 0.0%
Net fixed assets 58.3% 0.0%
Total assets 23.4% 0.0%

Base
Liabilities and equity 2012 2011
Accounts payable 33.1% 0.0%
Accruals 34.5% 0.0%
Notes payable 17.6% 0.0%
Total current liabilities 30.0% 0.0%
Long-term debt 19.3% 0.0%
Total liabilities 24.5% 0.0%
Common stock 11.1% 0.0%
Retained Earnings 48.6% 0.0%
Total common equity 22.4% 0.0%
Total liabilities and equity 23.4% 0.0%

Base
Percent Change Income Statements 2012 2011
Sales 25.0% 0.0%
Expenses excluding depr. and amort. 20.5% 0.0%
EBITDA 58.7% 0.0%
Depreciation and Amortization 9.4% 0.0%
EBIT 67.9% 0.0%
Interest Expense 9.5% 0.0%
EBT 84.0% 0.0%
Taxes (40%) 84.0% 0.0%
Net Income 84.0% 0.0%

above analysis indicates that sales have increased 25% while expenses
by 20.5% and assets by 23.4%. This shows that profitability has little imprved.