1 Balance Sheet EffectsReynolds Construction (RC) needs a piece of equipment that costs $200. RCcan either lease the equipment or borrow $200 from a local bank and buy theequipment. Reynolds’s balance sheet prior to the acquisition of the equipment is as follows: Current assets $300 Debt $400Net fixed assets 500 Equity 400Total assets $800 Total claims $800 a. (1) What is RC’s current debt ratio?(2) What would be the company’s debt ratio if it purchased theequipment?(3) What would be the debt ratio if the equipment were leased and thelease not capitalized?(4) What would be the debt ratio if the equipment were leased and thelease were capitalized? Assume that the present value of the leasepayments is equal to the cost of the equipment.b. Would the company’s financial risk be different under the leasing andpurchasing alternatives?
1
Reynolds Construction (RC) needs a piece of equipment that costs $200. RC
can either lease the equipment or borrow $200 from a local bank and buy the
equipment. Reynolds’s balance sheet prior to the acquisition of the equipment is as follows:
Current assets $300 Debt $400
Net fixed assets 500 Equity 400
Total assets $800 Total claims $800
a. (1) What is RC’s
(2) What would be the company’s debt ratio if it purchased the
equipment?
(3) What would be the debt ratio if the equipment were leased and the
lease not capitalized?
(4) What would be the debt ratio if the equipment were leased and the
lease were capitalized? Assume that the present value of the lease
payments is equal to the cost of the equipment.
b. Would the company’s financial risk be different under the leasing and
purchasing alternatives?
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