22.07.2022 - 11:57

# Reynolds Construction needs a piece of equipment that costs $200. Reynolds can either lease the equipment or borrow$200 from a local bank and buy the equipment. If the equipment is leased, the lease would not have to be capitalized. Reynolds’s balance sh

Question:

Reynolds Construction needs a piece of equipment that costs $200. Reynolds can either lease the equipment or borrow$200 from a local bank and buy the equipment. If the equipment is leased, the lease would not have to be capitalized. Reynolds’s balance sheet prior to the acquisition of the equipment is as follows:

Current assets 300

Debt 400

Fixed assets 500

Equity 400

Total assets 800

Total claims 800

a. What is Reynolds s current debt ratio?

b. What would the company’s debt ratio be if it purchased the equipment?

c. What would the company’s debt ratio be if the equipment were leased?

d. Would the company’s financial risk be different under the leasing and purchasing alternatives?

Show all work.

a. Reynolds' current debt ratio is 0.5 (calculated as Debt/Total Assets = 400/800). b. If Reynolds purchases the equipment by borrowing $200 from a local bank, its debt will increase by$200 to $600, and its debt ratio will be 0.75 (calculated as Debt/Total Assets = 600/800). c. If Reynolds leases the equipment, the lease would not have to be capitalized, and its balance sheet would remain the same, so its debt ratio would still be 0.5. d. Yes, the company's financial risk would be different under the leasing and purchasing alternatives. If Reynolds purchases the equipment, it will have more debt, which increases its financial risk because it will have to make payments on the loan, including interest, regardless of its revenue or profits. If Reynolds leases the equipment, it will not have additional debt, and it can return the equipment at the end of the lease term if it is no longer needed, reducing its financial risk. Do you know the answer? Not sure about the answer? Find the right answer to the question Reynolds Construction needs a piece of equipment that costs$200. Reynolds can either lease the equipment or borrow \$200 from a local bank and buy the equipment. If the equipment is leased, the lease would not have to be capitalized. Reynolds’s balance sh by subject Business, and if there is no answer or no one has given the right answer, then use the search and try to find the answer among similar questions.