Brandi Glasco
University of Phoenix
FIN/419
Dr. Bob Woerner
May 23, 2012
Week 4 – Individual Assignment
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 …show more content…
Amount of Short-Term Debt
|Financial Policy |Millions of |LTD (%) |STD (%) |
| |dollars | | |
|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 …show more content…
Decision: On the basis of EAT and return on equity it seems that Aggressive policy is recommended but the margin in all three options is so narrow that one can use any options
Working of interest total fund required = $65 million-$40 million from equity = $ 25 from debt
Aggressive Moderate Conservative
Short term 24 x 5.5% = 1.32 18 x 5% = 0.9 12 x 4.5 %= 0.54
Long term 1 x 8.5% 0.085 7 x 8% = 0.56 13 x 7.5% = 0.975
Total 1.405 million 1.46 million