Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
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Textbook Question
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
- 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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Jane is asked to evaluate whether it would be better to lease an asset or to borrow money from the
bank to buy the asset. The NPV from buying the asset is calculated to be $30,000. The NPV for the
lease versus borrow to buy analysis is calculated to be $500. Which of the following statements best
describe the lease versus buy decision for this investment?
None of the other statements is correct.
More than one of the other statements is correct.
O As the asset has positive NPV, Jane indifferent between leasing the asset or borrowing to buy it.
O Jane should lease the asset because her company would be better off by $30,000 compared to borrowing to
buy the asset.
O Jane should lease the asset as long as the NPV for the lease versus borrow to buy analysis is positive.
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…
A company decided to lease a food truck to promote sales across the country. The truck cost $65,000 and the company signed an irrevocable five-year lease. The company is trying to determine how to account for this asset. Which Financial Accounting Standards Board (FASB) guideline should the company use to report the truck?
Capitalize the lease only because its non-cancellable.
Capitalize the leased asset only if the company also capitalizes installment purchases.
Capitalize the lease because it is a fixed asset.
Capitalize the lease because it is long-term.
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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