To consider the financial statement effects of leasing versus purchasing an asset, review the following case of Mitata Company Mitata Company needs equipment that will cost the company $500. Mitata Company is considering to either purchase the equipment by borrowing $500 from a local bank or leasing the equipment. Assume that the lease will be structured as an operating lease. Some data from Mitata Company's current balance sheet prior to the lease or purchase of the equipment are: Balance Sheet Data (Dollars) Current assets $1,500 Debt $1,250 Net fixed assets 1,000 Equity 1,250 Total assets $2,500 Total claims $2,500 1. The company's current debt ratio is 2. If the company purchases the equipment by taking a loan, the total debt in the balance sheet will and the debt ratio will change to 3. If the company leases the equipment, the company's debt ratio will 4. In this case, the company's financial risk will be because the lease is not capitalized. under a lease agreement as compared to the financial risk in purchasing the equipment by taking a loan. 5. However, if the lease is capitalized, the financial risk under the lease agreement will be as compared to the risk in buying the equipment.
To consider the financial statement effects of leasing versus purchasing an asset, review the following case of Mitata Company Mitata Company needs equipment that will cost the company $500. Mitata Company is considering to either purchase the equipment by borrowing $500 from a local bank or leasing the equipment. Assume that the lease will be structured as an operating lease. Some data from Mitata Company's current balance sheet prior to the lease or purchase of the equipment are: Balance Sheet Data (Dollars) Current assets $1,500 Debt $1,250 Net fixed assets 1,000 Equity 1,250 Total assets $2,500 Total claims $2,500 1. The company's current debt ratio is 2. If the company purchases the equipment by taking a loan, the total debt in the balance sheet will and the debt ratio will change to 3. If the company leases the equipment, the company's debt ratio will 4. In this case, the company's financial risk will be because the lease is not capitalized. under a lease agreement as compared to the financial risk in purchasing the equipment by taking a loan. 5. However, if the lease is capitalized, the financial risk under the lease agreement will be as compared to the risk in buying the equipment.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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100%
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4a. More/Less
5. More/the same
Transcribed Image Text:To consider the financial statement effects of leasing versus purchasing an asset, review the following case of Mitata Company
Mitata Company needs equipment that will cost the company $500. Mitata Company is considering to either purchase the equipment by borrowing
$500 from a local bank or leasing the equipment. Assume that the lease will be structured as an operating lease.
Some data from Mitata Company's current balance sheet prior to the lease or purchase of the equipment are:
Balance Sheet Data
(Dollars)
Current assets
$1,500
Debt
$1,250
Net fixed assets
1,000
Equity
1,250
Total assets
$2,500
Total claims
$2,500
1. The company's current debt ratio is
2. If the company purchases the equipment by taking a loan, the total debt in the balance sheet will
and the debt ratio will change to
3. If the company leases the equipment, the company's debt ratio will
4. In this case, the company's financial risk will be
because the lease is not capitalized.
under a lease agreement as compared to the financial risk in purchasing the equipment by
taking a loan.
5. However, if the lease is capitalized, the financial risk under the lease agreement will be
as compared to the risk in buying the
equipment.
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