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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 $35 million in current assets and $40 million in fixed assets in its operations next year, provided the level of current assets, anticipated sales, and EBIT for next year are $65 million and $7 million, respectively. The organization’s income tax rate is 35%. Stockholders’ equity will be used to finance $45 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.


Financial Policy

Millions of dollars

LTD (%)

STD (%)

Aggressive (large amount of short-term debt)
$25
8.6
5.6

Moderate (moderate amount of short-term debt)
$19
8.2
5.3

Conservative (small amount of short-term debt)
$13
7.2
4.3

Determine the following for each policy:
1.Expected rate of return on stockholders’ equity
2.Net working capital position
3.Current ratio
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