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Scott Equipment Organization-Scott Equipment Organization is investigating various combinations of




Question;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) $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;? Expected;rate of return on stockholders? equity;? Net;working capital position;? Current;ratio;Additional;details...;There;are three scenarios. Therefore you will have 9 calculations, three for each;scenario.;Solving;the Problem;To;solve a story problem you must first determine what the question is asking you;to solve.;You;are solving for the following;?;Expected rate of return on;stockholders? equity;?;Net working capital position;?;Current ratio;Next;what are the formulas necessary to calculate those answers?;ROE = Net Income/ Equity;Net;Working Capital = CA ? CL (chapter 14);Current;Ratio = CA/CL;Do;you have all the necessary data to solve the equations? You have some of the;information needed but not all. I will tell you that you are missing the LTD.;You are given the short-term debt and you are given the interest rate for each;the LDT and the STD. You need to calculate LTD. You are not given the Net;Income therefore you must calculate it. You will have to recall your accounting;classes to remember how to calculate this problem.;You;need to construct an Income Statement in order to calculate Net Income. I also;stated above that you need to calculate the LTD in order to do this you need to;construct a Balance Sheet. If you do not remember how to do this then refer to;chapter 12 where there is an example.;You have been given the CA and CL in the data provided so there should be no;problem completing the remaining formulas. You have been given STD. You have;been given the cost of both STD and LTD which you will need when completing the;Income Statement.


Paper#42521 | Written in 18-Jul-2015

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