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FIN - Scott Equipment Organization




Question;Scott Equipment Organization is investigating various combinations of short- and long-term debt in financing assets. Assume the organization has decided to employ $10 million in current assets and $15 million in fixed assets in its operations next year, and EBIT for next year is $8 million. The organization's income tax rate is 40%. Stockholders' equity will be used to finance $15 million of assets, with the remainder financed by short- and long-term debt. The organization is considering implementing one of the policies below.Current Assets: $10 millionFixed Assets: $15 millionTotal Assets: $25 millionStockholders' Equity: $15 millionTotal Amount of Assets to be financed by debt: $10 millionTax Rate: 40%Total EBIT: $8 millionAggressive StrategyShort Term Debt: $8 million, 6% interest rateLong Term Debt: $2 million, 8% interest rateModerate StrategyShort Term Debt: $5 million, 5.5% interest rateLong Term Debt: $5 million,7.5% interest rateConservative StrategyShort Term Debt: $3 million, 5.25% interest rateLong Term Debt: $7 million, 7.25% interest rateDetermine the following for each policy:Net IncomeExpected rate of return on stockholders' equity (Net Income/Equity)Net working capital position (Current Assets - Current Liabilities)Current ratio (Current Assets/Current Liabilities)Would you rate them low, medium, or high with respect to profitability?Would you rate them low, medium, or high with respect to risk?What is your recommendation to management? Why?


Paper#47758 | Written in 18-Jul-2015

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