Scott equipment organization is investigating various combinations.

Scott Equipment Organization is investigating various combinations of short- and long-term debt in financing assets. Assume the organization has decided to employ $10 million in current assets and $15 million in fixed assets in its operations next year, and EBIT for next year is $8 million. The organization’s income tax rate is 40%. Stockholders’ equity will be used to finance $15 million of assets, with the remainder financed by short- and long-term debt. The organization is considering implementing one of the policies below.

 

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Current Assets: $10 million

Fixed Assets: $15 million

Total Assets : $25 million

 

Stockholders’ Equity: $15 million

Total Amount of Assets to be financed by debt: $10 million

 

Tax Rate: 40%

Total EBIT: $8 million

 

Aggressive Strategy

Short Term Debt: $8 million, 6% interest rate

Long Term Debt: $2 million, 8% interest rate

 

Moderate Strategy

Short Term Debt: $5 million, 5.5% interest rate

Long Term Debt: $5 million,7.5% interest rate

 

Conservative Strategy

Short Term Debt: $3 million, 5.25% interest rate

Long Term Debt: $7 million, 7.25% interest rate

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