University of Phoenix
Dr. Bob Woerner
May 23, 2012
Week 4 – Individual Assignment
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 |LTD (%) |STD (%) | | |dollars | | | |Aggressive |$24 |8.5 |5.5 | |(large amount of short-term debt) | | | | |Moderate |$18 |8.0 |5.0 | |(moderate amount of short-term debt) | | | | |Conservative |$12 |7.5 |4.5 | |(small amount of short-term debt) | | | |
Determine the following for each policy:
• Expected rate of return on stockholders’ equity
• Net working capital position
• Current ratio
Less: Interest See working(1,405,000)(1,460,000)(1,515,000) EBT4,595,0004,540,0004,485,000
Less: tax 40%(1,838,000)(1,816,000)(1,794,000)
Expected rate of return...