Aduba Builders needs a piece of equipment that costs $250. Aduba can either lease the equipment or borrow $250 from a local bank and buy the equipment. If the equipment is leased, the lease would not have to be capitalized. Aduba's balance sheet prior to the acquisition of the equipment is as follows: • Current assets: $400 • Net fixed assets: $600 • Total assets: $1,000 • Debt: $500 • Equity: $500 • Total claims: $1,000 (1) What is Aduba's current debt ratio? (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?

Aduba Builders needs a piece of equipment that costs $250. Aduba can either lease the equipment or borrow $250 from a local bank and buy the equipment. If the equipment is leased, the lease would not have to be capitalized. Aduba's balance sheet prior to the acquisition of the equipment is as follows: • Current assets: $400 • Net fixed assets: $600 • Total assets: $1,000 • Debt: $500 • Equity: $500 • Total claims: $1,000 (1) What is Aduba's current debt ratio? (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?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter19: Lease Financing

Section: Chapter Questions

Problem 1P: Reynolds Construction (RC) needs a piece of equipment that costs 200. RC can either lease the...

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What is aduba's current debt ratio?
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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. Reynoldss balance sheet prior to the acquisition of the equipment is as follows: a. (1) What is RCs current debt ratio? (2) What would be the companys 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 companys financial risk be different under the leasing and purchasing alternatives?
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1. What is the cost of the right of use asset? 2. What is the depreciation for current year?