Chapter 20, Problem 1P

### Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

Chapter
Section

### Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

# LEASING Cordell Construction needs a piece of equipment that can be leased or purchased. The equipment costs $100. One option is to borrow$100 horn 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$350 Fixed assets 400 Equity 350 Total assets $700 Total liabilities and equity$700 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.

Summary Introduction

To Determine: The debt ratio of the company if it prefer to buy the equipment, the debt ratio of the company if the equipment is leased and the reasons on whether the  financial risk of the company is dissimilar when the equipment is leased or bought.

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.

Explanation

Determine the companyās balance sheet of the company

 Balance Sheet of CC Assets Amount Liabilities Amount Current Assets $300 Debt$450 Fixed Assets $500 Equity$350 Total Assets $800 Total Liabilities and Equity$800

Determine the debt ratio of the company if it prefer to buy the equipment

DebtāRatioIfāPurchased=[DebtTotalāAssets]=[$450$800]=0.5625āorā56

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