15-2. Assume in Problem 15-1 that Minetello's tax rate is 40% and that the equipment's CCA would be $20,000 per year. If the company leased the asset on a 2-year lease, the payment would be $22,000 at the beginning of each year. If Minetello borrowed and bought, the bank would charge 10% interest on the loan. In either case, the equipment is worth nothing after 2 years and will be discarded. Should Minetello lease or buy the equipment?

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15-1. 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:

Current assets	$15,000	Debt	$20,000
Net fixed assets	65,000	Equity	60,000
Total Assets	80,000	Total claims	80,000

(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?

Answer- a) 1. Debt ratio at present = Debt/Total assets

= 20,000/80,000

=25%

2. Debt ratio if it purchases the equipment = Debt/Total assets

= (20,000+40,000)/ (80,000+40,000)

=60,000/120,000 = 50%

3. Debt ratio if the equipment was leased = 20,000/120,000

= 16.67%

b) Yes, since the equipment is bought with borrowed money, the financial risk is higher. The portion of the debt and thus the companys risk increases.]