Financial Management: 20-1 Reynolds Construction needs a piece of equipment

Financial Management
20-1 Balance Sheet Effects
Reynolds Construction needs a piece of equipment that costs $200. Reynolds either can 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’s balance sheet prior to the acquisition of the equipment is as follows:
Current assets 300
Net fixed assets 500
Total assets 800

Debt 400
Equity 400
Total claims 800

a. (1) What is Reynolds’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?
b. Would the company’s financial risk be different under the leasing and purchasing alternatives?
Powered by