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 | Millions of dollars | LTD (%) | STD (%) |
| Aggressive | $24 | 8.5% | 5.5% |
| (large amount of short-term debt) | |||
| Moderate | $18 | 8.0% | 5.0% |
| (moderate amount of short-term debt) | |||
| Conservative | $12 | 7.5% | 4.5% |
(small amount of short-term debt)
Determine the following for each policy:
· Expected rate of return on stockholders’ equity
· Net working capital position
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