Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
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Chapter 19, Problem 1P
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:
- 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 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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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
Intermediate Financial Management (MindTap Course List)
Ch. 19 - Define each of the following terms: a. Lessee;...Ch. 19 - Distinguish between operating leases and financial...Ch. 19 - Prob. 3QCh. 19 - Prob. 4QCh. 19 - Prob. 5QCh. 19 - Prob. 6QCh. 19 - Prob. 7QCh. 19 - Prob. 8QCh. 19 - Reynolds Construction (RC) needs a piece of...Ch. 19 - Lease versus Buy Consider the data in Problem...
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