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?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN: 9781337395083

Author: Eugene F. Brigham, Phillip R. Daves

Publisher: Cengage Learning

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Leasing

Leasing is a contractual arrangement in which someone (a lessee) pays the owner (or lessor) of a building, land, vehicle, or other asset for the use of that asset. The lease is the agreement between lessee and lessor.

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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:

Chapter 19, Problem 1P, Reynolds Construction (RC) needs a piece of equipment that costs 200. RC can either lease the

a.
1. (1) What is RC’s current debt ratio?
2. (2) What would be the company’s debt ratio if it purchased the equipment?
3. (3) What would be the debt ratio if the equipment were leased and the lease not capitalized?
4. (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?

Definition Definition Financial statement that provides a snapshot of an organization's financial position at a specific point in time. It summarizes a company's assets, liabilities, and shareholder's equity, detailing what the company owns, what it owes, and what is left over for its owners. The balance sheet serves as a crucial tool to assess the financial health and stability of a company, as well as to help management make informed decisions about its future investments and financial obligations.

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Solution Summary: The author analyzes company R's current debt ratio, if equipment is purchased and leased but not capitalized, and the firm’s financial risk under leasing and purchasing options.

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