Question
Moab Company has total assets of $3,500,000 and total liabilities of $3,000,000. Moab is considering two alternatives for acquiring additional warehouse space. Under the first
Moab Company has total assets of $3,500,000 and total liabilities of $3,000,000. Moab is considering two alternatives for acquiring additional warehouse space. Under the first alternative, the building would be purchased for $200,000 and financed by issuing long-term bonds. Under the second alternative, the building would be rented with an annual lease cost of $20,000 per year.
Round answers to one decimal place, if applicable.
a. Compute the company's current debt-to-equity ratio.
b. What effect would the addition of warehouse space have on its debt-to-equity ratio? Compute the debt-to-equity ratio under the following assumptions.
1. Assuming the building is purchased by issuing bonds?
2. Assuming the building is rented on an annual lease basis?
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