Business Finance Paper- Scott Equipment Organization Essay

Business Finance Paper- Scott Equipment Organization - Essay Example It is found under the series of financial leverage. It measures the rate upon the shareholders’ total accumulated investment value in a corporation. The formula to compute this percentage is given as follows: Net income (per annum) *100 Shareholders’ equity It is from the income statement of a company that this information to compute return on equity is obtained. It is usually dubbed as an artificial measure compared to other types of measurements. Firstly, because the shareholders’ equity has no relationship to the dividends paid to them from the company’s earnings. Secondly, is due to the fact that the shareholders’ equity has no relationship with what such share would be disposed off at in the open capital markets. However, it is not all irrelevant. It is essential as a nature of financial leverage since it shows the earning power of a company. It also enables comparison between companies and eventually in stock selection. (Siciliano, 2003 p111) (A)EXPECTED RATE OF RETURN ON STOCKHOLDERS' EQUITY FINANCING POLICY EBIT(USD) COST OF DEBT(USD) INCOME TAX 40% EAIT EQUITY E.R.O.E (%) AGGRESSIVE 6000000 1707692.37 1716923.052 2575384.578 40000000 6.438461 MODERATE 6000000 1190769.24 1923692.304 2885538.456 40000000 7.213846 CONSERVATIVE 6000000 733846.14 2106461.544 3159692.316 40000000 7.899231 Working capital Working capital is one of the major reasons people need information from the balance sheet of any given company. It is also an expression sometimes referred to as current company’s position. It usually shows in detail the condition, financially, of any business in focus. This communicates to the users by telling them about what would be left in a company’s short term assets subsequent to the payment of short term liabilities. Therefore, if working capital is high, this shows that the company is facing minimal strain financially. By studying the situation of the company as portrayed by this ratio, one can tell if it owns resources vital to make internal expansions or if there is need to borrow. Working capital = current assets – current liabilities (Kennon, 2011) (B) NET WORKING CAPITAL POSITION FINANCING POLICY CURRENT ASSETS SHORT TERM DEBT WORKING CAPITAL AGGRESSIVE 30000000 11076923 18923077 MODERATE 30000000 8307692 21692308 CONSERVATIVE 30000000 5538462 24461538 Current Ratio Current ratio measures the proportion of current assets against current liabilities. Current assets are made up of assets easily convertible into cash and cash. The assets which can be easily converted into cash are those assets which can be sold within a period of one year and such amounts used as a financing source for the day-to-day business operations. Current liabilities are obligations for which the business requires cash in a period of less than one year to fiance. Current ratio simply is a way to show how a firm is able to pay its short term liabil