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FIN 419 Week 4 Individual Assignment - Scott Equipment Organization Paper

FIN 419 Week 4 Individual Assignment - Scott Equipment Organization Paper
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Individual Assignment 2: Scott Equipment Organization Paper

 

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:

 

·         Expected rate of return on stockholders’ equity

·         Net working capital position

·         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? 

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