Suncoast Healthcare is planning to acquire a new X-ray machine that costs $200,000. The business can either lease the machine using an operating lease or buy it using a loan from a local bank. Suncoast's balance sheet prior to acquiring the machine is as follows: Current assets $100,000 Debt $400,000 Net fixed assets $900,000 Equity $600,000 Total assets $1,000,000 Total claims $1,000,000 a. What is Suncoast's current debt ratio? = (Total debt/Total assets) 0.4 ?

b. What would the new debt ratio be if the machine were leased using an operating lease? (Assume off-balance-sheet financing) (Total debt ratio = Total debt/Total liabilities) =

b1. If it were purchased? Total debt ratio = Total debt/Total assets = Spreadsheet solution:

_________________Amount Amount

Current assets __________________________ Debt ____________________________ Net fixed assets _________________________ Equity __________________________ Total assets ___________________________ Total claims ____________________

c. Is the financial risk of the business different under the two acquisition alternatives - Lease v. Purchase?