Minetello Construction needs a piece of equipment that costs $40,000. Minetello either can lease the equipment or borrow $40,000 from a local bank and buy the equipment. If the equipment is leased, the lease would not have to be capitalized. Minetello’s balance sheet prior to the acquisition of the equipment is as follows:
a. (1) What is Minetello’s debt ratio at present?
(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 financial risk be different under the leasing and purchasing alternatives?
Celtic Arts, Inc., earned $50,000 in 2007 and $80,000 in 2008. The company began operations on January 1, 2007, with a $600,000 investment by stockholders and no debt. On June 30, 2008, the company borrowed $1,000,000 from a bank, payable in 10 years.
a. Determine the rate earned on total assets and the rate earned on total stockholders? equity for 2007. Round to two decimal places.
b. Determine the rate earned on total assets for 2008. Round to two decimal places.
c. Use the leverage formula to determine the rate earned on stockholders? equity for 2008.
