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.

Amount of Short-Term Debt
Aggress. 24 8.5 5.5
Moderate 18 8.0 5.0
Conserv. 12 7.5 4.5

Determine the following for each policy:
• Expected rate of return on stockholders’ equity
• Net working capital position
• Current ratio

Write a paper in which you evaluate profitability versus risk trade-offs of these policies. Would you rate them low, medium, or high with respect to profitability? Would you rate them low, medium, or high with respect to risk?