Ch 03-17 Build a Model Solution

3/4/2001

Chapter 3. Solution to Ch 03-17 Build a Model

Cumberland Industries' December 31 Balance Sheets (in thousands of dollars) Assets Cash and cash equivalents Short-term investments Accounts Receivable Inventories Total current assets Fixed assets Total assets Liabilities and equity Accounts payable Accruals Notes payable Total current liabilities Long-term debt Total liabilities Common stock Retained Earnings Total common equity Total liabilities and equity 2001 $91,450 $11,400 $103,365 $38,444 $244,659 $67,165 $311,824 2000 $74,625 $15,100 $85,527 $34,982 $210,234 $42,436 $252,670

$30,761 $30,477 $16,717 $77,955 $76,264 $154,219 $100,000 $57,605 $157,605 $311,824

$23,109 $22,656 $14,217 $59,982 $63,914 $123,896 $90,000 $38,774 $128,774 $252,670

Cumberland Industries December 31 Income Statements (in thousands of dollars) 2001 Sales $455,150 Expenses excluding depr. and amort. $386,878 EBITDA $68,272 Depreciation and Amortization $7,388 EBIT $60,884 Interest Expense $8,575 EBT $52,309 Taxes (40%) $20,924 Net Income $31,385 Common dividends Addition to retained earnings Other Data Year-end Stock Price # of shares (in thousands) Lease payment Sinking fund payment Tax rate $12,554 $18,831 2001 $17.25 10,000 $75,000 $0 40%

2000 $364,120 $321,109 $43,011 $6,752 $36,259 $7,829 $28,430 $11,372 $17,058 $6,823 $10,235 2000 $14.75 9,000 $75,000 $0 40%

Hint: Paste in the values for the 2001 Income Statement that you created in the Chapter 2 problems, "Ch 02-20 Build a Model.xls".

Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.

Ratio Analysis Liquidity Ratios Current Ratio Quick Ratio Asset Management Ratios Inventory Turnover Days Sales Outstanding Fixed Assets Turnover Total Assets Turnover Debt Management Ratios Debt Ratio Times-interest-earned ratio EBITDA coverage ratio Profitability Ratios Profit Margin Basic Earning Power Return on Assets Return on Equity Market Value Ratios Earnings per share Price-to-earnings ratio Cash flow per share Price-to-cash flow ratio Book Value per share Market-to-book ratio

2001 3.14 2.65 11.84 81.76 6.78 1.46 49.46% 7.10 1.71 6.90% 19.53% 10.06% 19.91% $3.14 5.50 $3.88 4.45 $15.76 1.09

2000 Industry Avg 3.50 2.92 10.41 84.56 8.58 1.44 49.03% 4.63 1.42 4.68% 14.35% 6.75% 13.25% $1.90 7.78 $2.65 5.58 $14.31 1.03 N O T A V A I L A B L E

Generally, we would have industry average data which could be used for comparative purposes, but such data is not available for this problem. a. Has Cumberland's liquidity position improved or worsened? Explain. Since the current ratio decreased from 3.50 to 3.14, and the quick ratio from 2.92 to 2.65, we conclude that Cumberland's liquidity position has deteriorated. If industry average data were available, we would compare Cumberland with those averages. b. Has Cumberland's ability to manage its assets improved or worsened? Explain. Results of Cumberland's asset management ratios are inconclusive. The inventory turnover ratio and day's sales outstanding both improved, which suggests better management. However, the fixed and total asset turnover ratios both worsened. Therefore, it is impossible to say definitively if asset management improved or declined. Again, industry average data would be useful. c. How has Cumberland's profitability changed during the last year? Cumberland's profitability greatly improved in the year 2001. All profit measures increased greatly. As we shall see from the DuPont analysis below, the primary reason for this improvement was that costs increased less rapidly than sales, i.e., the company's cost controls were good. d. Perform an extended Du Pont analysis for Cumberland for 2000 and 2001. ROE = PM x TA Turnover x Equity Multiplier 2000 19.91% 6.90% 1.46 1.98 1999 13.25% 4.68% 1.44 1.96 Here we see that the TA turnover and Equity Multiplier were both essentially unchanged, while the Profit Margin improved substantially. That improvement in the PM led to the sizeable increase in the ROE.

Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.

With only two years of data, it is not worthwhile constructing graphs, but if we had several more years of data, we would make some graphs to facilitate interpreting the results. Similarly, if we had industry average data, we would surely compare Cumberland with its peers. e. Perform a common size analysis. What has happened to the composition

Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.