Scott Equipment Organization Paper

Only available on StudyMode
  • Download(s) : 187
  • Published : October 23, 2010
Open Document
Text Preview
2.Scott Equipment Organization Paper
Based on the following scenario, complete the calculations below: 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 million in fixed assets, in its operations next year. Given the level of current assets, anticipated sales and Earnings Before Interest and Taxes (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 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 (%)
(large amount of short-term debt) $248.55.5
(moderate amount of short-term debt) $188.05.0
(small amount of short-term debt) $127.54.5

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?

The details are$ million
Current Assets30
Fixed Assets 35
Total Assets65
Equity Financing40
Debt Financing25
Short term Debt24 18 12
Long term Debt (total debt is $25)1 7 13 Interest Rate Short term5.5%5.0%4.50%
Interest Rate Long term8.5%8.0%7.50%
Sales60 60 60
EBIT6 6 6
Interest (Short term debt X interest rate + long term debt X long...
tracking img