Question

Begin with the partial model in the file Ch02 P20 Build a Model.xlsx on the textbook's Web site 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 Britton String's income statement. Also calculate total dividends and the addition to retained earnings Report all dollar figures in millions 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 Britton Strings Corp: Balance Sheets as of December 31 (Millions of Dollars) 2020 2019 Assets Cash and cash equivalents Short-term investments Accounts receivable Inventories $ 70 46 120 $264 $500 300 800 $ 60 42 140 $196 $438 262 700 Total current assets Net fixed assets Total assets Liabilities and Equity Accounts payable Accruals Notes payable $ 73 49 30 $152 217 $369 285 146 $431 $800 64 60 39 $163 178 341 $249 110 $359 $700 Total current liabilities Long-term debt Total liabilities Common stock Retained earnings Total common equity Total liabilities and equity c. Construct the statement of cash flows for 2020 Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202

Answer 1

Part (a)

Please see the table below. All financials are in $ mn. Please see the second column titled "Linkage" That will help you understand the mathematics. Dividends paid and addition to retained earnings appear as last two rows highlighted in yellow color in the table.

Income Statement for 2020
Parameter	Linkage	$ mn
Revenues	A	880
[-] Operating expenses excluding depreciation	B = 85% x A	748
[-] Depreciation	C = 10% x 300	30
Operating income	D = A - B - C	102
[-] Interest expenses	E	22
Earnings before taxes	F = D - E	80
[-] Taxes	G = 25% x F	20
Net income	H = F - G	60
[-] Dividends paid	I = 40% x H	24
Addition to retained earnings	J = H - I	36

Part (b)

Missing figures in the balance sheet (though you seem to have completed the balance sheet yourself because there is no missing figure under 2020 in the attached picture of the question).

Common stock = Closing balance of 2019 + fresh issuance of equity = 249 + 36 = 285

Retained earnings = Closing balance from 2019 + addition to the retained earnings for 2020 calculated in part (a) above = 110 + 36 = 146

Total common equity = sum of the above two items = 285 + 146 = 431

Total liabilities & equity = total liabilities + total equity = 369 + 431 = 800

Part (c)

Please see the table below for cash flow statement for 2020. While reading the table:

• Please note the sign [+] / [-] before every item to understand whether it has been added or subtracted in the flow
• Wherever increase in a balance sheet item has been calculated, it has been calculated as Value in 2020 - value in 2019.

Parameter		$ mn
Net income		60
[+] Depreciation		30
[-] Increase in receivables		-20
[-] increase in inventory		68
[+] increase in accounts payable		9
[+] Increase in accruals		-11
Cash flow from operations		40
[-] Investments		4
[-] Capital expenditure		68
Cash flow from investing activities		-72
Fresh debt		39
[-] Repayment of notes		9
[+] Fresh equity issuance		36
[-] Dividends paid		24
Cash flows from financing activities		42
Net Cash flows during the year		10
[+] Opening cash balance		60
Closing cash balance		70