Tessa Carey, Monique Cratty, Estevania Delgado, and Nora Villalobos FIN/419
December 17, 2011
Professor Jennifer Stapp
Scott Equipment Organization Paper
Many small companies use debt financing to achieve financial goals. Some choose to use debt consolidation financing. By having a wide range of financing options available, a company is able to get their business up and running faster. This paper will examine three options of financing for Scott Equipment. The aggressive, moderate, and conservative financing options will be calculated and compared in order to determine the best option for Scott Equipment. Summary of Short-Term and Long-Term Financing Policy Options
Short-term financing is usually used for a term of six to twelve months. It is typically used to increase the company’s amount of available working capital. This in turn assists the company in having the ability to buy a much needed piece of equipment or to pay utilities and suppliers. In this exercise, we were given the following table of financial information to assist in the determination of the best financing choice.
|Financial Policy |Millions of dollars | |Current Assets |$30 Million | |Fixed Assets |$35 Million | |Expected Sales |$60 Million | |EBIT |$6 Million | |Tax Rate |40% | |S.E. used for financing of |$40 Million | |assets | |
Aggressive Financial Policy
Aggressive financing policies “...are those policies of investing a company’s assets to gain the highest rate of return on the investment”(Murdock). The two most common advantages to using this option of financing are: Less chance of incurring bad debts
Money is typically recovered quicker and thus reducing the cash conversion cycle. There are always disadvantages to any financial option. The two that are prevalent in this financing option are: Customers sometimes object to this option and therefore causing the company to experience a loss in sales and customers. It is an expensive option to employ. Customers often have to be called repeatedly which often leads to multiple mailings. Using the data that was provided, the following calculations were made in an effort to evaluate the viability of choosing an aggressive financing policy.
| | | |Current Assets |$30 Million | |Fixed Assets | 35 Million | |Total Assets |$65 Million | |Current Liabilities |$24 Million @ 5.5% | |Long-term debt | 1 Million @ 8.5% | |Total Liabilities |$25 Million | |Stockholder’s Equity | 40 Million | |Total Liability & Stockholder’s Equity |$65 Million | |Expected Sales |$60 Million | |Expected EBIT | 6 Million | |Less: Interest STD |$1,320,000 | | LTD |$85,000 | |Earnings Before Taxes |$4.595 Million | |Less: Income Taxes | 1.838 Million | |Earnings After Taxes...