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 |
$24 |
8.5% |
5.5% |
|
(large amount of short-term debt) |
|||
|
Moderate |
$18 |
8.0% |
5.0% |
|
(moderate amount of short-term debt) |
|||
|
Conservative |
$12 |
7.5% |
4.5% |
(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