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# Ratios and budgeting

1. Information for Stone Company for a recent year is given below:

Sales= \$30,000,000
Interest Expense=4,000,000
Net Income= 5,000,000
Total Assets= 80,000,000
Noninterest Bearing current Liablities= 20,000,000
Cost of Capital= 10%
Tax Rate= 30%

Calculate for Stone:

A. NOPAT
B. Invested Capital
C. Return on investment
D. Residual Income

If the manager is evaluated on ROI will she accept an investment that pay 12%? Why or why not? Would this be good for the company? What if she is evaluated based on residual income?

Hinrich Entertainment distributes a DVD which sell for \$12 per unit. Hinrich pays \$7 per unit to buy the product. Selling costs of \$1 per unit is incurred to deliver the product to the customer. This is paid in cash when the product is sold. Additionally, Hinrich has \$50,000 per month in fixed and selling and administrative expenses (including \$3,000 in depreciation), which are paid half in the month incurred and half in next month. It is Hinrich policy to maintain an inventory at the end of each month equal to 20% of the next months projected cost of sales. Hinrich makes 30% of sales in cash, and rest are on credit. Credit sales are collected in the month after the sale. Budgeted monthly sales in units and dollars for the first three months of 2008 are as follows:

January = 20,000 units (240,000)
February= 22,000 units (264,000)
March= 26,000 units (312,000)

2. What amount of purchases of inventory (at cost) will be required in February?

3. What will total collections be in February?

4. What will Accounts Receivable and Accounts Payable be at the end of February?

5. What will the cash payment for selling and administrative expenses be in February including fixed and variable cash expenses?

6. What is the anticipated ending cash balance in February?

#### Solution Summary

The solution explains the calculations of some ratios and preparation of some budgets

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