Question

Zoom Company currently has $500 million of assets $160 million of debt, and Net income last year was $12 million. Calculate the company's return on assets ratio and debt/equity ratio under the following assumptions or changes:

1. No changes in above.

2. Assuming the company had leased $30 million of its assets "off the balance sheet."

3. Assuming the company had leased $60 million of its assets "off the balance sheet."

4. Assuming the company had leased $90 million of its assets "off the balance sheet."

Based on a review of your calculations for the financial ratios above, explain why a firm might want to engage in "off balance sheet" financing.

Answer 1

	Return on Assets		Debt/Equity
	Net Income/Total Assets
1	$12 million/$500 million		$160 million/$340 million
	2.40%		0.47
2	$12 million/($500 million - $30 million)		$160 million/$310 million
	2.55%		0.52
3	$12 million/($500 million - $60 million)		$160 million/$280 million
	2.73%		0.57
4	$12 million/($500 million - $90 million)		$160 million/$250 million
	2.93%		0.64
	Explanation: Off-balance sheet items is an accounting practice.
	It can keep debt-to-equity (D/E) and leverage ratios low,
	facilitating cheaper borrowing.