Problem 19-01 Balance Sheet Effects Reynolds Construction (RC) needs a piece of
ID: 2781598 • Letter: P
Question
Problem 19-01
Balance Sheet Effects
Reynolds Construction (RC) needs a piece of equipment that costs $150. RC can either lease the equipment or borrow $150 from a local bank and buy the equipment. If the equipment is leased, the lease would not have to be capitalized. RC's balance sheet prior to the acquisition of the equipment is as follows:
What is RC's current debt ratio? Round your answer to two decimal places.
%
What would be the company's debt ratio if it purchased the equipment? Round your answer to one decimal place.
%
What would be the debt ratio if the equipment were leased? Round your answer to two decimal places.
%
Problem 19-01
Balance Sheet Effects
Reynolds Construction (RC) needs a piece of equipment that costs $150. RC can either lease the equipment or borrow $150 from a local bank and buy the equipment. If the equipment is leased, the lease would not have to be capitalized. RC's balance sheet prior to the acquisition of the equipment is as follows:
Current assets $250 Debt $350 Net Fixed assets 500 Equity 400 Total assets $750 Total claims $750What is RC's current debt ratio? Round your answer to two decimal places.
%
What would be the company's debt ratio if it purchased the equipment? Round your answer to one decimal place.
%
What would be the debt ratio if the equipment were leased? Round your answer to two decimal places.
%
Explanation / Answer
1.) Current Debt =$350
Current Equity =$400
Current Debt Ratio =Current Debt/(Current Debt + Current Equity) = 350/750 = 0.4667
2.) If equipment is purchased, New Debt =$350 + $150 =$500
New Equity =$400
New Debt Ratio = 500/(500+400) =500/900 = 0.5556
3.) If the equipment is leased, the debt to equity ratio will remain same at 0.4667 level as there will be no change in debt or equity in that case.