Fin-419- Week 4- Scott Equipment

Topics: Finance, Corporate finance, Inventory Pages: 6 (1314 words) Published: July 27, 2013
Scott Equipment Organization Paper
Finance for Decision Making FIN/419
University of Phoenix

Scott Equipment Organization Paper
Scott Equipment Organization is currently investigating a variety of short-term and long-term debt combinations in financing assets. Currently the firm has decided to employ $320 million in fixed assets in its operations for next year. However, this will depend upon the levels of current assets and anticipated sales. The earnings before interest and taxes (EBIT) for next year are $60 million and $6 million. The organization’s income tax rate is 40%. The stockholders’ equity will be used to finance $40 million of assets. This will be done with the remainder of the financed short-term and long-term debt. The Scott Equipment Organization is currently considering implementing one of three new policies. These policies include: aggressive financial policy which includes a large amount of short-term debt, moderate policy that includes a moderate amount of short-term debt, and a conservative policy which includes a small amount of short-term debt.

The following chart indicates the types of financial policies, the millions of dollars associated with year and the long term and short term debts in percentages. Figure 1 Amount of Short Term Debt Chart

|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 |5 | |  |  |  |  | |Conservative (small amount of short-term debt) |$12 |7.5 |4.5 | | | | | |

The following chart is used to calculate the Scott Equipment Organization’s expected rate of return (ROE) on stockholders’ equity, net working capital position and the current ratio which indicates if the ratio is low, medium or high depending upon the risk. Figure 2 Rate of Return, Net Working Capital & Current Ratio Chart |Aggressive |Moderate |Conservative | |Balance sheet: |Balance sheet: |Balance sheet: | |C/A $30 C/L $18 |C/A $30 C/L $18 |C/A $30 C/L $12 | |F/A $35 LTD $7 |F/A $35 LTD $7 |F/A $35 LTD $13 | |Equity $40 |Equity $40 |Equity $40 | |T/A $65 |T/A $65 |T/A $65 | |Income Statement: |Income Statement: |Income Statement: | |EBIT $6M...

References: Gitman, L. J. (2009). Principles of managerial finance (12th ed.). Boston, MA: Pearson Addison Wesley.
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