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
Fixed assets 500
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?
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