Financial Management: Theory & Practice
15th Edition
ISBN: 9781337248006
Author: Eugene F. Brigham; Michael C. Ehrhardt
Publisher: Cengage Learning US
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Chapter 19, Problem 1P
a).1
Summary Introduction
To determine: Current debt ratio.
2.
Summary Introduction
To determine: The current debt ratio if the equipment purchased.
3.
Summary Introduction
To determine: The debt ratio if the equipment leased.
b)
Summary Introduction
To determine: The financial risk under the purchasing and leasing alternative.
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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. 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?
(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?
Cordell Construction needs a piece of equipment that can be leased orpurchased. The equipment costs $100. One option is to borrow $100 from the local bankand use the money to buy the equipment. The other option is to lease the equipment. Thecompany’s balance sheet prior to the equipment purchase or lease is shown below:What would be the company’s debt ratio if it chose to purchase the equipment? Whatwould be the company’s debt ratio if it leased the equipment and it could keep the leaseoff its balance sheet? Is the company’s financial risk any different whether the equipmentis leased or purchased? Explain.
Bradley Co. is expanding its operations and is in the process of selecting the method of financing this program.After some investigation, the company determines that it may (1) issue bonds and with the proceeds purchase the needed assets or (2) lease the assets on a long-term basis. Without knowing the comparative costs involved, answer these questions:
(a) What might be the advantages of leasing the assetsinstead of owning them?(b) What might be the disadvantages of leasing the assets instead of owning them?(c) In what way will the balance sheet be differently affected by leasing the assets as opposed to issuing bonds and purchasing the assets?
Chapter 19 Solutions
Financial Management: Theory & Practice
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- To consider the financial statement effects of leasing versus purchasing an asset, review the following case of Hack Wellington Company Hack Wellington Company needs equipment that will cost the company $560. Hack Wellington Company is considering to either purchase the equipment by borrowing $560 from a local bank or leasing the equipment. Assume that the lease will be structured as an operating lease. Some data from Hack Wellington Company's current balance sheet prior to the lease or purchase of the equipment are: Balance Sheet Data (Dollars) Current assets $2,940 Debt $1,680 Net fixed assets 1,260 Equity 2,520 Total assets $4,200 Total claims $4,200 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 because the lease is not capitalized. under a lease agreement as compared to the finandial…arrow_forwardDevon Corporation is trying to decide whether to lease or purchase a piece of equipment. The total cost to lease the equipment will be $156,500 over its estimated life, while the total cost to buy the equipment will be $122.600 over its estimated life. At Devon's required rate of return, the net present value of the cost of leasing the equipment is $110,600 and the net present value of the cost of buying the equipment is $125.500. Based on financial factors. Devon should: Multiple Choice lease the equipment, saving $33.900 over buying buy the equipment, saving $33,900 over leasing ease the equipment, saving $14,900 over buying buy the equipment, saving $14,900 ever leasingarrow_forwardArchie company lends C1,000 to prosperity Co for five years, and it measures the assets at amortized costs. The loan carries no interest. Instead, Archi company expects other future economic benefits, such as an implicit right to receive goods or services at favourable prices. This right does not qualify the criteria of asset under PSAK 19 “intangible asset”. On initial recognition, the market rate of interest, for a similar five-year loan with payment of interest at maturity, is 10% per year. How should Archie company account this transaction?arrow_forward
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