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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 million;Fixed Assets: $15 million;Total Assets: $25 million;Stockholders' Equity: $15 million;Total Amount of Assets to be financed by debt: $10 million;Tax Rate: 40%;Total EBIT: $8 million;Aggressive Strategy;Short Term Debt: $8 million, 6% interest rate;Long Term Debt: $2 million, 8% interest rate;Moderate Strategy;Short Term Debt: $5 million, 5.5% interest rate;Long Term Debt: $5 million,7.5% interest rate;Conservative Strategy;Short Term Debt: $3 million, 5.25% interest rate;Long Term Debt: $7 million, 7.25% interest rate;Determine the following for each policy;Net Income;Expected 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#53020 | Written in 18-Jul-2015

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