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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
Millions of dollars
Aggressive (large amount of short-term debt)
Moderate (moderate amount of short-term debt)
Conservative (small amount of short-term debt)
Determine the following for each policy:
· Expected rate of return on stockholders’ equity
· Net working capital position
· Current ratio