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# answers-odd-problems-ch20 - SOLUTIONS TO END-OF-CHAPTER...

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Chapter 20 Lease Financing SOLUTIONS TO END-OF-CHAPTER PROBLEMS 20-1 a. (1) Reynolds’ current debt ratio is \$400/\$800 = 50%. (2) If the company purchased the equipment its balance sheet would look like: Current assets \$300 Debt (including lease)\$600 Fixed assets 500 Leased equipment 200 Equity \$400 Total assets \$1,000 Total claims \$1,000 Therefore, the company’s debt ratio = \$600/\$1,000 = 60%. (3) If the company leases the asset and does not capitalize the lease, its debt ratio = \$400/\$800 = 50%. b. The company’s financial risk (assuming the implied interest rate on the lease is equivalent to the loan) is no different whether the equipment is leased or purchased. 20-3 Year_________________ 0 1 2 3 4____ I. Cost of Owning: Net purchase price (\$1,500,000) Depr. tax savings a \$198,000 \$270,000 \$ 90,000 \$ 42,000 Net cash flow (\$1,500,000 ) \$198,000 \$270,000 \$ 90,000 \$ 42,000 PV cost of owning at 9% (\$ 991,845 ) II. Cost of Leasing: Lease payment (AT) (240,000) (240,000) (240,000) (240,000) Purch. option price b (250,000 ) Net cash flow \$ 0 (\$240,000 ) (\$240,000 ) (\$240,000 ) (\$490,000 ) PV cost of leasing at 9% (\$ 954,639 ) III. Cost Comparison Net advantage to leasing (NAL)= PV cost of owning - PV cost of leasing = \$991,845 - \$954,639 = \$37,206.

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