Problem:
Dixie Corporation is evaluating whether to lease or purchase needed equipment at a cost of $10,000. If the equipment is leased, the lease would not have to be capitalized. The company's balance sheet prior to the acquisition of the equipment is as follows.
Equipment cost $10,000
Current Balance Sheet
Current assets $50,000 Debt $35,000
Net Fixed assets 40,000 Equity 55,000
Total assets $90,000 Total claims $90,000
1) Calculate the company's current debt ratio?
2) Calculate the company's debt ratio if it purchases the equipment.
3) Calculate the company's debt ratio if it leases the equipment?
4) Will the company's ROA and ROE ratios be affected by its decision to lease or purchase? Why or why not?
5) What factors should the company consider in coming to its decision other than net advantage to leasing? Why?