Leasing Connors Construction needs a piece of equipment that can either be lease

Question

Leasing

Connors Construction needs a piece of equipment that can either be leased or purchased. The equipment costs $200. One option is to borrow $200 from the local bank and use the money to buy the equipment. The other option is to lease the equipment. If Connors chooses to lease the equipment, it would not capitalize the lease on the balance sheet. Below is the company's balance sheet prior to the purchase or leasing of the equipment:

What would be the company's debt ratio if it chose to purchase the equipment? Round your answer to two decimal places.
%

What would be the company's debt ratio if it chose to lease the equipment? Round your answer to two decimal places.
%

Would the company's financial risk be different depending on whether the equipment was leased or purchased?
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The company's financial risk (assuming the implied interest rate on the lease is equivalent to the loan) is greater if the equipment is purchased.

The company's financial risk (assuming the implied interest rate on the lease is greater than the interest rate on the loan) is no different whether the equipment is leased or purchased.

The company's financial risk (assuming the implied interest rate on the lease is less than the interest rate on the loan) is no different whether the equipment is leased or purchased.

The company's financial risk (assuming the implied interest rate on the lease is equivalent to the loan) is no different whether the equipment is leased or purchased.

The company's financial risk (assuming the implied interest rate on the lease is equivalent to the loan) is greater if the equipment is leased.

Current assets $350 Debt $500 Fixed assets 500 Equity 350 Total assets $850 Total liabilities and equity $850

Explanation / Answer

1 What would be the company's debt ratio if it chose to purchase the equipment? Round your answer to two decimal places. Debt =500+200 =700 Total Asset =350 +500 +200 equipment =1050 debt ratio = debt/total asset = 700/1050 =67% 2 What would be the company's debt ratio if it chose to lease the equipment? Debt =500 Total Asset =850 debt ratio 500/850 =59% D The company’s financial risk (assuming the implied interest rate on the lease is equivalent to the loan) is no different whether the equipment is leased or purchased.

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