Build a Model

Chapter: 2
Problem: 20

a. Britton String Corp. manufactures specialty strings for musical instruments and tennis racquets. Its most
recent sales were $880 million; operating costs (excluding depreciation) were equal to 85% of sales; net fixed
assets were $300 million; depreciation amounted to 10% of net fixed assets; interest expenses were $22
million; the state-plus-federal corporate tax rate was 25%; and it paid 40% of its net income out in dividends.
Given this information, construct its income statement. Also calculate total dividends and the addition to
retained earnings. Report all dollar figures in millions.

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 Britton String Corp. 2020

(Millions of dollars)
Sales Revenue $880
Expenses (excluding depreciation) as a percent of sales 85.0%
Net fixed assets $300
Depr. as a % of net fixed assets 10.0%
Tax rate 25.0%
Interest expense $22
Dividend Payout Ratio 40%

Britton String Corp.: Income Statement 2020

(Millions of dollars)
Sales $880
Operating costs excluding depreciation $748
EBITDA $132
Depreciation (Cumberland has no amortization charges) 30
EBIT $102
Interest expense $22
EBT $80
Taxes (25%) $20
Net income $60

Common dividends $24

Addition to retained earnings $36

b. Britton String’s partial balance sheets follow. Britton issued $36 million 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 millions of dollars) $36

Britton String Corp: December 31 Balance Sheets

(Millions of dollars)
2020 2019
Assets
Cash and cash equivalents $70 $60
Short-term investments $46 $42
Accounts Receivable $120 $140
Inventories $264 $196
Total current assets $500 $438
Net fixed assets $300 $262
Total assets $800 $700

Liabilities and equity

Accounts payable $73 $64
Accruals $49 $60
Notes payable $30 $39
Total current liabilities $152 $163
Long-term debt $217 $178
Total liabilities $369 $341
Common stock $285 $249
Retained earnings $146 $110
Total common equity $431 $359
Total liabilities and equity $800 $700

Always check for balancing (these should be zero): $0.0000 $0.0000

c. Construct the statement of cash flows for the most recent year.

Statement of Cash Flows

(in thousands of dollars)
2020
Operating Activities
Net Income $60
Adjustments:
Noncash adjustment:
Depreciation $30
Due to changes in working capital:
Due to change in accounts receivable $20
Due to change in inventories ($68)
Due to change in accounts payable $9
Due to change in accruals ($11)
Net cash provided (used) by operating activities $40

Investing Activities
Cash used to acquire gross fixed assets ($68)
Due to change in short-term investments ($4)
Net cash provided (used) by investing activities ($72)

Financing Activities
Due to change in notes payable ($9)
 Due to change in long-term debt $39
Due to change in common stock $36
Payment of common dividends ($24)
Net cash provided (used) by financing activities $42

Net increase/decrease in cash $10

Add: Cash balance at the beginning of the year 60
Cash balance at the end of the year $70
 3/7/2020

nis racquets. Its most

o 85% of sales; net fixed
xpenses were $22
come out in dividends.
and the addition to

ow. Using this data and

mon stock in the most

s for common stock,