THE ANSWER IS NOT 0.52 AND 0.41.... Leasing Connors Construction needs a piece o
ID: 2613009 • Letter: T
Question
THE ANSWER IS NOT 0.52 AND 0.41....
Leasing
Connors Construction needs a piece of equipment that can either be leased or purchased. The equipment costs $200. One option is to borrow $200 from the local bank and use the money to buy the equipment. The other option is to lease the equipment. If Connors chooses to lease the equipment, it would not capitalize the lease on the balance sheet. Below is the company's balance sheet prior to the purchase or leasing of the equipment:
What would be the company's debt ratio if it chose to purchase the equipment? Round your answer to two decimal places.
%
What would be the company's debt ratio if it chose to lease the equipment? Round your answer to two decimal places.
%
Explanation / Answer
The answers have to be .52 and .41. The calculations are shown below. There can be a difference in answer only if the dollar figures are different from what are provided in the question. Please check them again. Based on the figures provided in the question, the solution is given below:
Part 1)
Revised Balance Sheet (if the equipment is purchased)
The formula for calculating debt ratio is Debt/Total Assets*100 (if required in percentage)
Using the figures in the above balance sheet, we get,
Debt Ratio = 550/1,050*100 = 52.38%
___________
Part 2)
If the asset is leased by the company, its debt would remain at the same level of $350 and total assets would continue to be $850 (as lease is not capitalized). The debt ratio in such a case would be:
Debt Ratio = 350/850*100 = 41.17%
Current Assets 250 Debt (including lease) 550 Fixed Assets 600 Equity 500 Leased Equipment 200 Total Assets $1,050 Total Claims $1,050Related Questions
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