Scott Equipment Essay example
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, …show more content…
Net Working Capital Position
The EFinancemanagement.com (n.d.) website defines net working capital as “the difference between the current assets and current liabilities of a business. It is that part of the current asset which is left after paying off all the current liabilities” (para. 1). Net working capital is important because it is a gauge of the firm’s financial position. It provides information that lets stockholder’s identify whether the firm can pay off its short-term debts. It is based on current assets and current liabilities. Current assets are cash or assets that can quickly be converted into cash, in a year or less. Current liabilities are liabilities that are payable in a year or less and include short-term loans, outstanding expenses, and many more. Scott determines their net working capital by taking $30 million in assets and subtracting the amount of short-term debt. The aggressive policy results in the least amount of net working capital between the moderate and conservative policy. The aggressive policy results in $6 million, the moderate policy=$12 million, and the conservative policy=$18 million in net working capital.
Current ratio helps to determine the liquidity of the firm. Gitman (2009), states that “the liquidity of a firm is measured by its ability to satisfy its short-term obligations as