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Scott Equipment Organization is investigating various combinations of short- and long-term debt

Scott Equipment Organization is investigating various combinations of short- and long-term debt
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FINANCE

FINANCE 419 (FIN 419)

FIN 419
Principles of Managerial Finance
Lawrence J. Gitman

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.
• Determine the following for each policy:
o Expected rate of return on stockholders’ equity
o Net working capital position
o 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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FILE: MS WORD

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