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The New Scott Equipment Organization Paper Based on the

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The New 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 $25 million in current assets, along with $40 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 (%)

Aggressive
(large amount of short-term debt)


$20


8.5


5.5

Moderate
(moderate amount of short-term debt)


$15


8.0


5.0

Conservative
(small amount of short-term debt)


$10


7.5


4.5



a. Determine the following for each of the financing policies:

1) Expected rate of return on stockholders’ equity – how do you determine ROE? What is the formula? What information do you need to do so?

2) Net working capital position – how do you determine NWC? What is the formula? What information do you need to do so?

3) Current ratio – how do you determine the current ratio? What is the formula? What information do you need to do so?

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?



How does funding relate to risk?



How does funding relate to profitability?


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Customer: replied 5 years ago.
Im not able to access the solution
Customer: replied 5 years ago.
The financial policy was revised, please look at the financial policy which
include 20mil, 15 mil and 10 mil
Customer: replied 5 years ago.

Sorry this is the correct one!

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 dollars

LTD (%)

STD (%)

Aggressive
(large amount of short-term debt)

$20

8.5

5.5

Moderate
(moderate amount of short-term debt)

$15

8.0

5.0

Conservative
(small amount of short-term debt)

$10

7.5

4.5

Determine the following for each policy:

· Expected rate of return on stockholders’ equity

· Net working capital position

· Current ratio

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