SOLUTION: 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

Question 158200: 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 in fixed assets, in the operations next year. Given the level of current assets, anticipated sales adn Earnings Before Interest and Taxes (EBIT) for next year are $60 million and $6 million, respectively. The organizations 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) $24 8.5 5.5
Moderate (moderate amount) 18 8.0 5.0
Conservative (small amount) 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?
Answer by ydscott(1) (Show Source): You can put this solution on YOUR website!

RELATED QUESTIONS
An investor has $50,000 to invest in three types of bonds: short-term, intermediate-term, (answered by richwmiller)

An investor has $39,000 to invest in three types of bonds: short-term, intermediate-term, (answered by greenestamps)

An investor has $10,000 to invest in three types of bonds: short term, medium term and... (answered by josmiceli)

Mark has $100,000 to invest. His financial consultant advises him to diversify his... (answered by ikleyn,josgarithmetic)

Mark has $100,000 to invest. His financial consultant advises him to diversify his... (answered by Theo)

An investor has $50,000 to invest in three types of bonds: short-term, intermediate-term, (answered by ikleyn)

Long term average number of computer failure in your organization is 2 per week. What is (answered by ikleyn)

An investor has $100,000 to invest in three types of bonds: short-term,... (answered by richwmiller)

Vigo Vacations has an equity multiplier of 2.5. The company�s assets are financed with... (answered by robertb)