Scott Equipment Organization

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.

Expected rate of return on stockholders equity
Networking capital position
Current ratio
Aggressive $24. 8.5%. 5.5%
Moderate. $18. 8.0%. 5.0%
Conservative $12. 7.5%. 4.5%