View the step-by-step solution to:

Scott Equipment Organization Paper Based on the following scenario, complete the calculations below:

2.Scott Equipment Organization Paper
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 $30 million in current assets, along with $35 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 (%)
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
a.      Determine the following for each of the financing policies:
1)     Expected rate of return on stockholders' equity
2)     Net working capital position
3)     Current ratio
b.     Evaluate the profitability versus risk trade-offs of these three policies. Would you rate each one "low", "medium", or "high" with respect to profitability? Would you rate each one "low", "medium", or "high" with respect to risk?  
3.     Text Assignments
Prepare responses to the following Problems from the e-text, Principles of Managerial Finance, (11th ed.) by Gitman:
a.      Chapter 14: Problems 14.9 and 14.16
14.9
Relaxation of credit standards Lewis Enterprises is considering relaxing its credit standards to increase its currently sagging sales. As a result of the proposed relaxation, sales are expected to increase by 10% from 10,000 to 11,000 units during the coming year; the average collection period is expected to increase from 45 to 60 days; and bad debts are expected to increase from 1% to 3% of sales. The sale price per unit is $40, and the variable cost per unit is $31. The firm's
required return on equal-risk investments is 25%. Evaluate the proposed relaxation, and make a recommendation to the firm. (Note: Assume a 365-day year.)
14.16
ETHICS PROBLEM Controlled disbursing is defined as an information product-that is, the bank on which the company's checks are drawn provides an early-morning notification of the total dollar amount of checks that will clear the account that day. Based on that notification, the company may then fund the account for that amount by the close of business that afternoon. How might controlled disbursing still be viewed as a form of "remote disbursing," and therefore be considered unethical?
b.     Chapter 15: Problem 15.9
Effective annual rate A financial institution made a $10,000, 1-year discount loan at 10% interest, requiring a compensating balance equal to 20% of the face value of the loan. Determine the effective annual rate associated with this loan. (Note: Assume that the firm currently maintains $0 on deposit in the financial institution.)

2.Scott Equipment Organization Paper
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 $30 million in
current assets, along with $35 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 (%)
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
 
a.      Determine the following for each of the financing policies:
1)     Expected rate of return on stockholders’ equity
2)     Net working capital position
3)     Current ratio
b.     Evaluate the profitability versus risk trade-offs of these
three policies. Would you rate each one “low”, “medium”, or
“high” with respect to profitability? Would you rate each one
“low”, “medium”, or “high” with respect to risk?
3.     Text Assignments
Prepare responses to the following Problems from the e-text, Principles
of Managerial Finance, (11th ed.) by Gitman:
a.      Chapter 14: Problems 14.9 and 14.16
14.9
Relaxation of credit standards Lewis Enterprises is considering relaxing
its credit standards to increase its currently sagging sales. As a
result of the proposed relaxation, sales are expected to increase by 10%
from 10,000 to 11,000 units during the coming year; the average
collection period is expected to increase from 45 to 60 days; and bad
debts are expected to increase from 1% to 3% of sales. The sale price
per unit is $40, and the variable cost per unit is $31. The firm’s
required return on equal-risk investments is 25%. Evaluate the proposed
relaxation, and make a recommendation to the firm. (Note: Assume a
365-day year.)
14.16
ETHICS PROBLEM Controlled disbursing is defined as an information
product—that is, the bank on which the company’s checks are drawn
provides an early-morning notification of the total dollar amount of
checks that will clear the account that day. Based on that notification,
the company may then fund the account for that amount by the close of
business that afternoon. How might controlled disbursing still be viewed
as a form of “remote disbursing,” and therefore be considered
unethical?
b.     Chapter 15: Problem 15.9
Effective annual rate A financial institution made a $10,000, 1-year
discount loan at 10% interest, requiring a compensating balance equal to
20% of the face value of the loan. Determine the effective annual rate
associated with this loan. (Note: Assume that the firm currently
maintains $0 on deposit in the financial institution.)

Recently Asked Questions

Why Join Course Hero?

Course Hero has all the homework and study help you need to succeed! We’ve got course-specific notes, study guides, and practice tests along with expert tutors.

-

Educational Resources
  • -

    Study Documents

    Find the best study resources around, tagged to your specific courses. Share your own to gain free Course Hero access.

    Browse Documents
  • -

    Question & Answers

    Get one-on-one homework help from our expert tutors—available online 24/7. Ask your own questions or browse existing Q&A threads. Satisfaction guaranteed!

    Ask a Question