Short and Long-term Debt

Running head: BUSINESS AND MARKETING
Short and Long-term Debt
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Short and Long-term Debt
Long-term debt refers to any type of indebtedness which is not likely to be settled within a period of twelve or less months. This ranges from a simple debt such as bank loan, mortgage, and balance due on bonds or any other particular financial obligation. Short term debt is any form of debt which is payable within a short period of time almost less than twelve months. In the case of Scott Equipment Organization whereby there is an investigation of short and long-term debt in financing assets, it is important to assume various parameters. The relevant details in $ million relating to the case study include;
Current assets 30
Fixed assets 35
Total assets 65
Equity financing 40
Debt financing 25
Aggressive moderate conservative
Short term debt 24
Long term Debt 25
Interest Rate Short term 5.5%, 5%, 4.5%
Interest Rate Long term8.5%, 8%, 7.5%
Sales 60
EBIT 6
Operating profit margin=EBIT/net sales
= 6/60
=10%
Expected rate of return on stockholder’s equity
Interest= short term debt x interest rate+ Long term debt x interest rate.
Aggressive=24* 5.5% + 25* 8.5%
=3.445%
Moderate= 18*5% + 25* 8% =2.9%
Conservative= 12*4.5% + 25*7.5%= 2.415%
Expected rate of return on stockholders equity = net income after tax

Stockholders equity
EBIT= 6
Earnings after interest equals 6*3.445%= 5.79
Moderate policy 6*2.9%= 5.826
Conservative policy 6*2.415%=5.86
Tax 40%
Aggressive policy earning after tax 5.79* 40%= 3.47
Moderate policy income after tax 5.826* 40%= 3.496
Conservative policy income after tax 5.86* 40%=3.516
Expected rate of return on stockholders equity = 3.47/40
Aggressive policy = 8.6%
Moderate policy =3.496/40
=8.7%
Conservative policy=3.516/40=8.8%
Net working capital
Net working capital equals to total current assets minus current liabilities. It is usually a measure of company’s efficiency and short term financial health. When the net working capital is positive it means that the company is in a position to pay off its short-term liabilities. On the other hand, a negative working capital means that a company is currently unable to meet its short-term liabilities with its current assets.
Net working capital = Current assets- current liabilities
Aggressive policy = 30-24
= 6
Moderate policy= 30-18
= 12
Conservative= 30- 12
=18
Using net working capital, the rank is as follows conservative, moderate, and aggressive. This reflects that according to conservative policy, the company is in a position to pay off its short term liabilities as it has a small amount of short term debt.
Current ratio
This lies under the category of liquidity ratio which provides relevant information about the firm’s capacity to meet its short-term financial obligation. Current ratio as the name suggests is the ratio between current assets and current liabilities. A current ratio of 1 signifies that the company’s current assets exceed its current liabilities (Gerald, 2007). The higher the current ratio the more a company is in a position to pay its obligations. This means that the company is in a position...