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.
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