Scott Equipment Organization
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Scott Equipment Organization is investigating the use of various combinations of short term and long-term debt in financing its assets. Assume that the organization has decided to employ $30 million in current assets, along with $35 in fixed assets, in the operations next year. Given the level of current assets, anticipated sales adn Earnings Before Interest and Taxes (EBIT) for next year are $60 million and $6 million, respectively. The organizations income tax rate is 40%; Stockholders equity will be used to finance $40 million of its assets, with the remainder being financed by short-term and long-term debt. Scott’s is considering implementing one of the following financing policies:
Amount of Short-Term Debt
Financial Policy In Mil. LTD% STD%
Aggressive (large amount) $24 8.5 5.5
Moderate (moderate amount) 18 8.0 5.0
Conservative (small amount) 12 7.5 4.5
A) Determine the following for each of the financing policies:
1) Expected rate of return on stockholders equity
2) Net working capital position
3) Current ratio
B) Evaluate the profitability versus risk trade-offs of these three
policies. Would you rate each one “low”, “medium”, or “high”
with respect to profitability? Would you rate
each “one”low”, “medium”, or “high” with respect to risk?
