Working capital policies
Not what you're looking for?
Can you help me get started on this assignment?
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 $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 (%)
Aggressive
(large amount of short-term debt) $20 8.5 5.5
Moderate
(moderate amount of short-term debt) $15 8.0 5.0
Conservative
(small amount of short-term debt) $10 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?
Purchase this Solution
Solution Summary
The solution explains the trade off in respect of working capital policies
Solution Preview
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 $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 ...
Purchase this Solution
Free BrainMass Quizzes
Business Processes
This quiz is intended to help business students better understand business processes, including those related to manufacturing and marketing. The questions focus on terms used to describe business processes and marketing activities.
IPOs
This Quiz is compiled of questions that pertain to IPOs (Initial Public Offerings)
Learning Lean
This quiz will help you understand the basic concepts of Lean.
Six Sigma for Process Improvement
A high level understanding of Six Sigma and what it is all about. This just gives you a glimpse of Six Sigma which entails more in-depth knowledge of processes and techniques.
Operations Management
This quiz tests a student's knowledge about Operations Management