Explore BrainMass
Share

Explore BrainMass

    Working Captial Policies

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    Can you help me get started with this assignment?

    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 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

    ? Determine the following for each policy:

    o Expected rate of return on stockholders' equity
    o Net working capital position
    o Current ratio

    ? 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?

    The book that is being used is Principles of Finance by Kawrence Gitman 2005

    © BrainMass Inc. brainmass.com October 10, 2019, 12:25 am ad1c9bdddf
    https://brainmass.com/business/interest-rates/working-captial-policies-291648

    Solution Preview

    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 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 ...

    Solution Summary

    The solution explains how to evaluate different working capital policies

    $2.19