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Scott Equipment Organization is investigating various combinations

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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 In mil. 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

• Evaluate profitability versus risk trade-offs of these policies. Would you rate them low, medium, or high with respect to profitability? Would you rate them low, medium, or high with respect to risk?
Submitted: 6 years ago.
Category: Business and Finance Homework
Expert:  linda_us replied 6 years ago.
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Linda
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