Connors Construction needs a piece of equipment that can either be leased or pur

Question

Connors Construction needs a piece of equipment that can either be leased or purchased. The equipment costs $100. One option is to borrow $100 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:

Current assets $300 Debt $350 Fixed assets 400 Equity 350 Total assets $700 Total liabilities and equity $700

Explanation / Answer

Part a:
(350 + 100) / (700 + 100)=0.5625
Part b:
350 / (700 + 100) = 0.4375

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