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EBK FINANCIAL MANAGEMENT: THEORY & PRAC
15th Edition
ISBN: 9781305886902
Author: EHRHARDT
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Question
Chapter 19, Problem 1P
a).1
Summary Introduction
To determine: Current debt ratio.
2.
Summary Introduction
To determine: The current debt ratio if the equipment purchased.
3.
Summary Introduction
To determine: The debt ratio if the equipment leased.
b)
Summary Introduction
To determine: The financial risk under the purchasing and leasing alternative.
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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:
Current assets: $300 Debt: $400
Net Fixed Assets: 500 Equity: 400
Total assets: 800 Total claims: 800
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 was not capitalized?
(4) What would be the debt ratio if the equipment were leased and the lease were capitlaized? 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?
Johnstone Company is facing several decisions regarding investing and financing activities. Address each decision independently. (FV of $1, PV of $1, FVA of $1, FVAD of $1 and PVAD of$1) (Use appropriate factor(s) from the tables provided.)
1.On June 30, 2021, the Johnstone Company purchased equipment from Genovese Corp. Johnstone agreed to pay Genovese $20,000 on the purchase date and the balance in five annual installments of $8,000 on each June 30 beginning June 30, 2022. Assuming that an interest rate of 10% properly reflects the time value of money in this situation, at what amount should Johnstone value the equipment?
2.Johnstone needs to accumulate sufficient funds to pay a $5000,000 debt that comes due on December 31, 2026. The company will accumulate the funds by making five equal annual deposits to an account paying 9% interest compounded annually. Determine the required annual deposit if the first deposit is made on December 31, 2021.
3.On January 1, 2021, Johnstone leased…
Johnstone Company is facing several decisions regarding investing and financing activities. Address each decision independently. (FV of $1, PV of $1, FVA of $1, FVAD of $1 and PVAD of$1) (Use appropriate factor(s) from the tables provided.)
1.On June 30, 2021, the Johnstone Company purchased equipment form Genovese Corp. Johnstone agreed to pay Genovese $20,000 on the purchase date and the balance in five annual installments of $8,000 on each June 30 beginning June 30, 2022. Assuming that an interest rate of 10% properly reflects the time value of money in this situation, at what amount should Johnstone value the equipment?
2.Johnstone needs to accumulate sufficient funds to pay a $5000,000 debt that comes due on December 31, 2026. The company will accumulate the funds by making five equal annual deposits to an account paying 9% interest compounded annually. Determine the required annual deposit if the first deposit is made on December 31, 2021.
3.On January 1, 2021, Johnstone leased…
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EBK FINANCIAL MANAGEMENT: THEORY & PRAC
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