FIN 419 WEEK 4

FIN 419 WEEK 4

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FIN 419 WEEK 4

Description:

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