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Scott Equipment Organization Paper
Based on the following scenario, complete the calculations
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 (%)
(large amount of short-term debt) $24 8.5 5.5
(moderate amount of short-term debt) $18 8.0 5.0
(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’
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


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