Fin/419 fin 419 fin419 week 4 – individual assignment – scott
Scott Equipment Organization, a hypothetical company that is considering using short-term and longer term debt to fund assets in the next year. To assess the profitability versus risk trade-offs associated with this policy, it is important to understand the expectations of rate of return on stockholders’ equity, net working capital position, and current ratio. To evaluate the profitability of each policy, we will examine these factors in this paper.
Aggressive Financial Policy: For this policy, the expected rate of return on stockholders’ equity is 7.4%, which equates to a medium level regarding profitability. EBIT (6,000,000) x Stockholder Equity (40,000,000) = 15%. The amount generated from borrowing would make up the remaining 85%. 8.5% plus 5.5% equals 14%. This is equal to 140%. Therefore, 70/2=7.4% must be divided. The net working capital for this policy is $26 million. This figure was calculated by subtracting the total 35 million fixed assets from total liabilities (24+18+12=54). As such, there are 26 million available for current usage such as payroll or inventory purchases etc., assuming all other ratios remain consistent – indicating that it has sufficient cash flow ability with regards to liquidity needs… Additionally its current ratio stands 3:1 given 12million divided 4 resulting figure tell higher than ideal however still within range normalcy explaining comfortable compliance regulations laws set forth governing body standardizing industries wide creditor payment terms protocols industry average falls around 2: 1 slightly lower due lenders anticipating payments faster less accommodating default danger.
Moderate Financial Policy: For this policy ,the likely rate return shareholders ‘equity estimated 6 % indicative little bit lower compared aggressive counterpart moves direction conforming regulatory guidelines presenting viable option alternative leave room maneuver event precipitated crisis arises . Additionally, the working capital situation is relatively comparable to that mentioned option and falls approximately $ 28 million area. This gives you additional breathing room should it be necessary. Lastly ,current figure recorded closer what looking 4 : 1 another indicator funds adequate cover short – spanning expenses keeping operations running smoothly ledgers balance extends over particular period time allowing calculate figures read closely monitored providing insight financial health entity note area point better managed maintained same token shall discussed later portion discuss importance consequences breaching either side equation downwards.