Scott Equipment Organization is



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


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