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Scott Equipment

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Scott Equipment Corporation
Scott Equipment Corporation is trying to determine which financial policy, between aggressive, moderate, or conservative, will best fit their business. We will discuss these options and include the calculations that will show the expected rate of return on stockholders’ equity, net working capital position, and current ratio.
According to Gitman (2009), profitability is “the relationship between revenues and costs generated by using the firm’s assets-both current and fixed-in productive activities” (p. 639). The firm chooses to increase their profits but must do so by increasing revenue and or decreasing cost. Risk is “the probability that a firm will be unable to pay its bills as they come due” (Gitman, 2009, p. 639). If a firm’s net working capital is high it is a lower risk because it has the funding to pay its bills. The trade-off between profitability and risk is done by changing current assets and current liabilities, separately, to identify the impact of each and decide which fits best with the firm.
Expected Rate of Return on Stockholder’s Equity
Expected rate of return on stockholder’s equity is determined by taking the percentage of return (profit) that was gained on each dollar that the stockholder invested. The calculation is net income divided by stockholders’ equity. In the model of Scott, shown in Table 1, we see that the expected rate of return for the aggressive policy is 6.89%, moderate policy is 6.81%, and conservative policy is 6.73%. These percentages show that, by using six million dollars in EBIT and we subtract the interest, as shown in Table 2, we are able to arrive at the EBT. From this point we take the EBT and subtract the tax giving us the EAT. We use this number to arrive at the expected rate of return. The aggressive policy shows that Scott would have higher EAT than the conservative policy. The moderate...

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