19-2 Lease versus Buy Consider the data in Problem 19-1. Assume that Reynolds’stax rate is 40% and that the equipment’s depreciation would be $100 per year. Ifthe company leased the asset on a 2-year lease, the payment would be $110 atthe beginning of each year. If Reynolds borrowed and bought, the bank wouldcharge 10% interest on the loan. In either case, the equipment is worth nothingafter 2 years and will be discarded. Should Reynolds lease or buy the equipment?info from 19-1: Balance Sheet Effects Reynolds Construction needs a piece of equipment thatcosts $200. Reynolds can either lease the equipment or borrow $200 from a localbank and buy the equipment. If the equipment is leased, the lease would nothave to be capitalized. Reynolds’s balance sheet prior to the acquisition of theequipment is as follows:Current assets $300 Debt $400Net fixed assets 500 Equity 400Total assets $800 Total claims $800a. (1) What is Reynolds’s current debt ratio?(2) What would be the company’s debt ratio if it purchased the equipment?(3) What would be the debt ratio if the equipment were leased?b. Would the company’s !nancial risk be different under the leasing andpurchasing alternatives?
This question was answered on: May 23, 2022
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