Fundamentals of Financial Manageme...
Fundamentals of Financial Manageme...
LEASING Connors Construction needs a piece of equipment that can be leased or purchased. The equipment costs $100. One option is to borrow $100 from the local bank and use the money to buy the equipment. The other option is to lease the equipment. The company’s balance sheet prior to the equipment purchase or lease is shown below:
| Current assets | $300 | Debt | $400 |
| Fixed assets | 500 | Equity | 400 |
| Total assets | $800 | Total liabilities and equity | $800 |
What would be the company’s debt ratio if it chose to purchase the equipment? What would be the company’s debt ratio if it leased the equipment and it could keep the lease off its balance sheet? Is the company’s financial risk any different whether the equipment is leased or purchased? Explain.
To Determine: The debt ratio of the company if it prefers to buy the equipment.
Introduction: Debt ratio is also called as solvency ratio that estimates a company's total liabilities as a level of its total assets. The debt ratio demonstrates an organization's capacity to settle its liabilities with its assets.
Determine the company’s balance sheet of the company
| Balance Sheet of CC | ||||
| Assets | Amount | Liabilities | Amount | |
| Current Assets | $300 | Debt | $500 | |
| Fixed Assets | $600 | Equity | $400 | |
| Total Assets | $900 | Total Liabilities and Equity | $900 | |
Determine the debt ratio of the company if it prefers to buy the equipment
To Determine: The debt ratio of the company if the equipment is leased.
To Discuss: The reasons on whether the financial risk of the company is dissimilar when the equipment is leased or bought.
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