Question Details

1.	Scott Equipment Organization Paper

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 above level of assets. Anticipated sales and EBIT for next year are $60 million and $6 million, respectively. The organization- 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.

Financial Policy 	STD 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:

o	Expected rate of return on stockholders’ equity
o	Net working capital position
o	Current ratio

•	Determine: Would you rate them low, medium, or high with respect to profitability? Would you rate them low, medium, or high with respect to risk?  

•	You may wish to present your conclusions in table form.

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