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 (large amount of short-term debt) $24 8.
Moderate (moderate amount of short-term debt) $18 8.
Conservative(small amount of short-term debt) $12 7.
Determine the following for each policy:
• Expected rate of return on stockholders’ equity
• Net working capital position
• Current ratio