Based on the following scenario, complete the calculations below:
Scott Equipment Organization is investigating the use of various combinations of short-term and long-term debt in financing its assets. Assume that the organization has decided to employ $25 million in current assets, along with $40 million in fixed assets, in its operations next year. Given the level of current assets, anticipated sales and Earnings Before Interest and Taxes (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 its assets, with the remainder being financed by short-term and long-term debt. Scott’s is considering implementing one of the following financing policies:
Amount of Short-Term Debt
Financial Policy In mil. LTD (%) STD (%)
(large amount of short-term debt) $20 8.5 5.5
(moderate amount of short-term debt) $15 8.0 5.0
(small amount of short-term debt) $10 7.5 4.5
Determine the following for each policy:
Expected rate of return on stockholders’ equity
Net working capital position
Evaluate profitability versus risk trade-offs of these policies. Would you rate them low, medium, or high with respect to profitability? Would you rate them low, medium, or high with respect to risk?
This question was asked on Aug 08, 2011.
Recently Asked Questions
- Please help me answer these questions. Problem 1 (21 points): Suppose the demand function for bicycles takes the following form Q = 100 ???? 5p + 2pm + Y ????
- Confucius was once asked if there was one rule that could serve as the guide to one's whole life. He replied: "What you do not want done to yourself, do not do
- Part 1 - Initial Post For this discussion post, I want each of you to do the following: 1) Define what a technicway is and briefly discuss how it impacts human