Scott Equipment Organization is
investigating various combinations of short- and long-term debt in financing
assets. Assume the organization has decided to employ $30 million in current
assets and $35 million in fixed assets in its operations next year. Provided
this level of current assets; anticipated sales, and EBIT for next year are $60
million and $6 million, respectively. The organization’s income tax rate is
40%. Stockholders’ equity will be used to finance $40 million of assets, with
the remainder financed by short- and long-term debt. The organization is
considering implementing one of the policies in the diagram.
investigating various combinations of short- and long-term debt in financing
assets. Assume the organization has decided to employ $30 million in current
assets and $35 million in fixed assets in its operations next year. Provided
this level of current assets; anticipated sales, and EBIT for next year are $60
million and $6 million, respectively. The organization’s income tax rate is
40%. Stockholders’ equity will be used to finance $40 million of assets, with
the remainder financed by short- and long-term debt. The organization is
considering implementing one of the policies in the diagram.
Amount of Short-Term Debt Interest
Rate
Rate
Financial Policy
In mil.
LTD (%)
STD (%)
Aggressive
(large amount of short-term debt)
(large amount of short-term debt)
$24
8.5
5.5
Moderate
(moderate amount of short-term debt)
(moderate amount of short-term debt)
$18
8.0
5.0
Conservative
(small amount of short-term debt)
(small amount of short-term debt)
$12
7.5
4.5
Determine the following
for each policy:
for each policy:
Expected rate of return on stockholders’
equity
equity
Net working capital position
Current ratio
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