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Fin419 Principles of Managerial Finance
Week 4 Individual Assignment - Scott Equipment Organization Paper (Excel Format)
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 $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 ratio