Question

Luther Industries currently has the following balance sheet (in thousands of dollars):
Assets Liabilities Cash $500 $4500 Debt Property, Plant, and Equipment $7000 $3000 Equity Total Debt plus Equity $7500 $7500
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

0 0
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Answer #1

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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