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 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 and the lease was not capitalized?
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
Current assets: $300 Debt: $400
Net Fixed Assets: 500 Equity: 400
Total 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 the equipment?
(3) What would be the debt ratio if the equipment were leased and the lease was not capitalized?
(4) What would be the debt ratio if the equipment were leased and the lease were capitlaized? 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?
Trending now
This is a popular solution!
Step by step
Solved in 7 steps with 6 images
