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

Financial Policy

In mil.

LTD (%)

STD (%)


(large amount of short-term debt)





(moderate amount of short-term debt)





(small amount of short-term debt)




Determine the following
for each policy:

Expected rate of return on stockholders’

Net working capital position

Current ratio

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