# Chapter 2. 2-14 Solution

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Chapter 2. 2-14 a. Cumberland Industries' most recent sales were \$455,000,000; operating costs (excluding depreciation) were equal to 85% of sales; net fixed assets were \$67,000,000; depreciation amounted to 10% of net fixed assets; interest expenses were \$8,550,000; the state-plus-federal corporate tax rate was 40% and Cumberland paid 25% of its net income out in dividends. Given this information, construct Cumberland's income statement. Also calculate total dividends and the addition to retained earnings. 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 2010 (Thousands of dollars) Sales Revenue \$455 000 Expenses (excluding depreciation) as a percent of sales 85,0% Net fixed assest \$67 000 Depr. as a % of net fixed assets 10,0% Tax rate 40,0% Interest expense \$8 550 Dividend Payout Ratio 25 % Cumberland Industries: Income Statement (Thousands of dollars) 2010 Sales \$455 000 Operating costs excluding depreciation \$386 750 EBITDA \$68 250 Depreciation (Cumberland has no amortization charges) \$6 700 EBIT \$61 550 Interest expense \$8 550 EBT \$53 000 Taxes (40%) \$21 200 Net income \$31 800 Common dividends \$7 950 Addition to retained earnings \$23 850 b. Cumberland Industries' partial balance sheets are shown below. Cumberland issued \$10,000,000 of new common stock in the most recent year. Using this information and the results from part a, fill in the missing values for common stock, retained earnings, total common equity, and total liabilities and equity. Dollar value of common stock issued (in thousands