Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
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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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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?
Cordell Construction needs a piece of equipment that can be leased orpurchased. The equipment costs $100. One option is to borrow $100 from the local bankand use the money to buy the equipment. The other option is to lease the equipment. Thecompany’s balance sheet prior to the equipment purchase or lease is shown below:What would be the company’s debt ratio if it chose to purchase the equipment? Whatwould be the company’s debt ratio if it leased the equipment and it could keep the leaseoff its balance sheet? Is the company’s financial risk any different whether the equipmentis leased or purchased? Explain.
Boswell Manufacturing Company has been in business for five years. Thecompany has now decided to expand its operations. To finance this process, the company is considering two approaches:
(1) Lease the assets that are needed on a long term basis or
(2) Issue bonds and use the proceeds to purchase the assets. The CEO is seeking your advice on the matter. Without knowledge of the comparative cost involved, how would you advise him in the following questions:
(i) What might be the advantages and disadvantages of leasing the assetsinstead of owning them. (List at least three advantages and threedisadvantages) (ii) How will leasing the assets instead of owning them affect the financialstatements?
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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