reyonlds construction needs a piece of equipment that cost $200. reynolds can ei
ID: 2760356 • Letter: R
Question
reyonlds construction needs a piece of equipment that cost $200. reynolds can either lease the equipment or borrow $200 from a local bank and buy the equipment. if the equipment is leased the lease would not have to be capitalized. reynolds balance sheet prior to the acqusition of the equipment is a follows:
current assets $300 debt $400
net fixed $300 equity $400
total assest $800 total claims $800
a 1. what is reynolds current debt ratio?
2 what would be the company debt ratio if it purchased the equipment ?
3. what would be the debt ratio if the equipment were leased?
4. would the company financial risk be different under the leasing and purchasing alternatives?
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Explanation / Answer
a 1. what is reynolds current debt ratio?
2 what would be the company debt ratio if it purchased the equipment ?
3. what would be the debt ratio if the equipment were leased?
4. would the company financial risk be different under the leasing and purchasing alternatives?
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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