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 this 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   Interest Rate

Financial Policy 

In mil.

LTD (%)

STD (%)

Aggressive
(large amount of short-term debt) 

$24

8.5

5.5

Moderate
(moderate amount of short-term debt) 

$18

8.0

5.0

Conservative
(small amount of short-term debt) 

$12

7.5

4.5

Determine the following for each policy:

Expected rate of return on stockholders’ equity

Net working capital position

Current ratio