Luther Industries currently has the following balance sheet (in
thousands of dollars):
Luther is about to add a new fleet of delivery trucks. The price of
the fleet is $1.5 million.
If Luther acquires the new fleet of delivery trucks using a capital
lease, Luther's Debt to Equity ratio will be closest to:
Group of answer choices
0.66
1.5
0.80
2.0
Homework Answers
In the capital lease, the acquired asset is treated as the firm has borrowed money for the purchase of the asset.
So, New Balance sheet will look like this.
| Assets | Amount | Liabilities | Amount |
| Cash | $500 | Debt(4,500 + 1,500) | $6,000 |
| PPE (7,000 + 1,500) | $8,500 | Equity | $3,000 |
| Total | $9,000 | Total | $9,000 |
Debt-to-Equity = Debt/Equity = $6,000/$3,000 = 2.0
So, 4th option is correct.
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