Vanlu Construction needs a piece of equipment that costs $200. Vanlu can either lease the equipment...

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Vanlu Construction needs a piece of equipment that costs $200.Vanlu can either lease the equipment or borrow $200 from a localbank and buy the equipment. If the equipment is leased, the leasewould not have to be capitalized. Vanlu’sbalance sheet prior to the acquisition of the equipment is given inthe table below.
Current assets $400 , Net fixed Assets $400, Total assets=$800.
Debt $300, Equity $500, Total claims= $800.
1) What is Vanlu’s current debt ratio (i.e., debt-to-assetsratio)?
2) What would be the company’s debt ratio if it purchased theequipment?
3) What would be the debt ratio if the equipment wereleased?
4) Would the company’s financial risk be different under theleasing and purchasing alternatives?

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4.1 Ratings (646 Votes)

1 Debt Ratio Total Debt Total Assets 300 800 0375 2 If the equipment is purchased then there will addition in the debt of 200 and addition in the asset of 200 500 1000 05 3 If See Answer

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Vanlu Construction needs a piece of equipment that costs $200.Vanlu can either lease the equipment or borrow $200 from a localbank and buy the equipment. If the equipment is leased, the leasewould not have to be capitalized. Vanlu’sbalance sheet prior to the acquisition of the equipment is given inthe table below.Current assets $400 , Net fixed Assets $400, Total assets=$800.Debt $300, Equity $500, Total claims= $800.1) What is Vanlu’s current debt ratio (i.e., debt-to-assetsratio)?2) What would be the company’s debt ratio if it purchased theequipment?3) What would be the debt ratio if the equipment wereleased?4) Would the company’s financial risk be different under theleasing and purchasing alternatives?