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.

The
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
guidelines.

I have done the first part below I
need the1400 word paper completed

Week 4 – Scott
Equipment Organization Paper

Determine
the following for each policy:

· 
Expected
rate of return on stockholders’ equity

· 
Net
working capital position

· 
Current
ratio

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.

Financial Policy	Expected Rate of Return on Stockholders’   Equity	Net Working Capital Position	Current Ratio
Aggressive   (large amount of short-term   debt)	6.89%	6   million	5:4
Moderate   (moderate amount of short-term   debt)	6.81%	12   million	5:3
Conservative   (small amount of short-term   debt)	6.73%	18   million	5:2
Profitability	High	Medium	Low
Risk	Low	Medium	High

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? 

The aggressive
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.

 

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