# Fina 3007 — Balance Sheet Effects

(18â1) Balance Sheet EffectsReynolds Construction needs a piece of equipment that costs \$200. Reynolds can either lease the equipment or borrow \$200 from a local bank and buy the equipment. If the equipment is leased, the lease would not have to be capitalized. Reynoldsâs balance sheet prior to the acquisition of the equipment is as follows:Current assets \$300 Debt \$400 Net fixed assets 500 Equity 400 Total assets \$800 Total claims \$800a. (1) What is Reynoldsâs current debt ratio?(2) What would be the companyâs debt ratio if it purchased the equipment?(3) What would be the debt ratio if the equipment were leased?b. Would the companyâs financial risk be different under the leasing and purchasing alternatives?(18â2) Lease versus BuyConsider the data in Problem 18-1. Assume that Reynoldsâs tax rate is 40% and that the equipmentâs depreciation would be \$100 per year. If the company leased the asset on a 2-year lease, the payment would be \$110 at the beginning of each year. If Reynolds borrowed and bought, the bank would charge 10% interest on the loan. In either case, the equipment is worth nothing after 2 years and will be discarded. Should Reynolds lease or buy the equipment?

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