The Story line:: 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.
Project needed: Write
a 1,400-word paper in which you 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?
Format your paper consistent with APA
I have done the first part below I
need the1400 word paper completed
Week 4 – Scott
Equipment Organization Paper
the following for each policy:
rate of return on stockholders’ equity
working capital position
The expected rate of return on
stockholders’ equity fluctuates from 6.89%, 6.81%, and 6.73% for the
Aggressive, moderate, and conservative policies respectively. The net working
capital position reflects vast differences from 6 million to 18 million.
Finally, the current ratio ranges from 5:4, 5:3, and 5:2 for the Aggressive,
moderate, and conservative policies respectively.
Expected Rate of Return on Stockholders’
Net Working Capital Position
(large amount of short-term
(moderate amount of short-term
(small amount of short-term
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?
policy is rated high since the return on stockholders’ equity is higher, medium
in moderate, and low in conservative for the same reasoning. The liquidity is
less in aggressive and therefore rated as low, more liquidity in moderate and
conservative as compared to aggressive. Based upon the EAT and return on
equity, the aggressive policy is recommended.