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			2001	2000
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
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)
			2001	2000
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
Due to rounding, the numbers calculated in the Chapter 2 problem may differ slightly from these. Net Income			$31,385	$17,058
Common dividends			$12,554	$6,823
Addition to retained earnings			$18,831	$10,235
Other Data			2001	2000
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%
Ratio Analysis			2001	2000	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			81.76	84.56	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			10.06%	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
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.
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
(that is, percentage in each category) of assets and liabilities?
Common Size Balance Sheets
Assets			2001	2000
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%
Fixed assets			21.5%	16.8%
Total assets			100.0%	100.0%
Liabilities and equity			2001	2000
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			2001	2000
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%
Common size analysis shows that the composition of assets has not changed
very much, with all percentages roughly the same in each year. However,
expenses are much lower in 2001.
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			2001	2000
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%
Fixed assets			58.3%	0.0%
Total assets			23.4%	0.0%
				Base
Liabilities and equity			2001	2000
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			2001	2000
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%
Percent change analysis shows that sales have increased at a rate of 25%, but
expenses have increased by only 20.5%. Also, assets have increased at 23.4%,
a rate slightly less than sales. In summary, this shows that profitability has
improved quite a bit, while asset utilization has improved slightly (since assets
did not grow as much as sales.)