Using the following information, answer the following questions. Cumberland’s ca
ID: 2383170 • Letter: U
Question
Using the following information, answer the following questions. Cumberland’s cash flow statement for 2014.
Cumberland Industries December 31 Balance Sheets
(in thousands of dollars)
2014
2013
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
Income Statements
2014
2013
Sales
$455,150
$364,120
Expenses excluding depreciation and amortization
$386,878
$321,109
EBITDA
$68,273
$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%)
$20,924
$11,372
Net Income
$31,386
$17,058
Common dividends
$12,554
$6,823
Addition to retained earnings
$18,831
$10,235
Question 1. (5 points)
Calculate Cumberland’s net operating working capital (NOWC), total net operating capital (TNOC), net operating profit after taxes (NOPAT), and free cash flow (FCF) for Year 2014.
Question 2. (2 points)
Cumberland’s cost of capital is 16%. Calculate the company’s 2014 ROIC. Does Cumberland’s growth add value?
ROIC=
Question 3. (8 points)
Hope Industries just paid a dividend of $2.00 per share (i.e., D0 = $2.00). Analysts expect the company's dividend to grow 15 percent this year (i.e., D1 = $2.40), and 10 percent next year. After two years the dividend is expected to grow at a constant rate of 6 percent. The risk free rate is 4% and market risk premium is 5% and the firm is as risky as market. What should be the current price of the company's stock?
Cumberland Industries December 31 Balance Sheets
(in thousands of dollars)
2014
2013
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
Explanation / Answer
(1)
Step1: Computation of net operating working capital (NOWC).We have,
Net operating working capital (NOWC) = Current operating asset - Current operating liabilities
Net operating working capital (NOWC) = ( Cash and cash equivalents + Accounts Receivable + Inventories) - ( Accounts payable + Accruals)
Net operating working capital (NOWC) = ( 91,450 + 103,365 + 38,444) - ( 30,761 + 30,477)
Net operating working capital (NOWC) = 233,259 - 61,238 = $ 172,021
Hence, the net operating working capital (NOWC) is $ 172,021.
Step2: Computation of total net operating capital (TNOC).We have,
Total Net operating capital(TNOC) = Net Operating Working Capital + Non-current Operating Assets
Total Net operating capital(TNOC) = 172,021 + 67,165 = $ 239,186
Hence, Total Net operating capital(TNOC) is $ 239,186.
Step3: Calculation of net operating profit after taxes (NOPAT).We have,
Net operating profit after taxes (NOPAT)= EBIT (1-tax rate) = 60,884 ( 1-0.40) = 60,884 x 0.60 = $ 36,530
Hence, Net operating profit after taxes (NOPAT) is $ 36,530.
Step4: Computation of free cash flow (FCF).We have,
Free cash flow(FCF) = NOPAT - Cash flow for capital expenditures
Free Cash Flow(FCF) = 36,530 - 32,117 = $ 4,413
Hence,the free cash flow is $ 4,413.
Note: Cash flow for capital expenditures = Closing Fixed Asset + Depreciation - Opening Fixed Asset
Hence, Cash flow for capital expenditures = 67,165 + 7,388 - 42,436 = $ 32,117
(2) Computation of return of invested capital(ROIC).We have,
ROIC = NOPAT / Total net operating capital = 36,530 / 239,186* 100 = 15.27 %
Hence, the ROIC IS 15.27 %
The cost of capital = 16 %
Excess Returns = Return on Invested Capital - Cost of Capital = 15.27 - 16.00 = - 0.73 %
Hence, the firm does not growth add value.It is beacause, it has excess return is - 0.73 %
(3) Step1: Computation of cost of equity( Ke ).We have,
Ke = Risk free rate + beta x risk premium = 4 + 1 x 5 = 9 %
Hence, the cost of equity is 9%.
Note: Firm is as risky as market.So,it has beta 1.
Step2: Computation of Current price of stock.We have,
Po = D1 / ( 1 +Ke ) +D1(1 + g2 ) / ( 1 +Ke )2 + D1(1 + g2 ) (1+g3)/ (Ke -g3) / ( 1 +Ke )2
Where,
Po = Current price of stock
g = growth rate for period 1,2 and 3.
Ke = Cost of Equity
Po = 2.40 / (1.09) + 2.40(1.10) / (1.09)2 + 2.40(1.10)(1.06) / (0.09 - 0.06) / (1.09)2
Po = 2.20 + 2.22 + 78.51 = $ 82.93
Hence, Current price of the company's stock is $ 82.93
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