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Ch 03-17 Build a Model Solution 3/4/2001

Cumberland Industries' December 31 Balance Sheets(in thousands of dollars)

Assets 2001 2000Cash and cash equivalents $91,450 $74,625Short-term investments $11,400 $15,100Accounts Receivable $103,365 $85,527Inventories $38,444 $34,982

Total current assets $244,659 $210,234Fixed assets $67,165 $42,436

Total assets $311,824 $252,670

Liabilities and equityAccounts payable $30,761 $23,109Accruals $30,477 $22,656Notes payable $16,717 $14,217

Total current liabilities $77,955 $59,982Long-term debt $76,264 $63,914

Total liabilities $154,219 $123,896Common stock $100,000 $90,000Retained Earnings $57,605 $38,774

Total common equity $157,605 $128,774Total liabilities and equity $311,824 $252,670

Cumberland Industries December 31 Income Statements(in thousands of dollars)

2001 2000Sales $455,150 $364,120Expenses excluding depr. and amort. $386,878 $321,109

EBITDA $68,272 $43,011Depreciation and Amortization $7,388 $6,752

EBIT $60,884 $36,259Interest Expense $8,575 $7,829

EBT $52,309 $28,430Taxes (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 2001 2000Year-end Stock Price $17.25 $14.75# of shares (in thousands) 10,000 9,000Lease payment $75,000 $75,000Sinking fund payment $0 $0Tax rate 40% 40%

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

Hint: Paste in the valuesfor the 2001 IncomeStatement that you createdin the Chapter 2 problems,"Ch 02-20 Build aModel.xls".

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

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Ratio Analysis 2001 2000 Industry AvgLiquidity Ratios

Current Ratio 3.14 3.50 NQuick Ratio 2.65 2.92 O

Asset Management Ratios TInventory Turnover 11.84 10.41

Days Sales Outstanding 81.76 84.56 AFixed Assets Turnover 6.78 8.58 VTotal Assets Turnover 1.46 1.44 A

Debt Management Ratios IDebt Ratio 49.46% 49.03% LTimes-interest-earned ratio 7.10 4.63 AEBITDA coverage ratio 1.71 1.42 B

Profitability Ratios LProfit Margin 6.90% 4.68% EBasic Earning Power 19.53% 14.35%Return on Assets 10.06% 6.75%Return on Equity 19.91% 13.25%

Market Value RatiosEarnings per share $3.14 $1.90Price-to-earnings ratio 5.50 7.78Cash flow per share $3.88 $2.65Price-to-cash flow ratio 4.45 5.58Book Value per share $15.76 $14.31Market-to-book ratio 1.09 1.03

Generally, we would have industry average data which could be used for comparative purposes, but suchdata 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 thatCumberland's liquidity position has deteriorated. If industry average data were available, we wouldcompare 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'ssales outstanding both improved, which suggests better management. However, the fixed and total assetturnover ratios both worsened. Therefore, it is impossible to say definitively if asset management improvedor 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 weshall 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 1.981999 13.25% 4.68% 1.44 1.96

Here we see that the TA turnover and Equity Multiplier were both essentially unchanged, while the ProfitMargin 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.

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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 averagedata, 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.