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.