Finance – Scott Equipment Organization

Question 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 the 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 Financial Policy Millions of dollars LTD (%) STD (%) Aggressive (large amount of short-term debt) $24 8.5 5.5 Moderate (moderate amount of short-term debt) $18 8.0 5.0 Conservative(small amount of short-term debt) $12 7.5 4.5 Determine the following for each policy: • Expected rate of return on stockholders’ equity • Net working capital position • Current ratio

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