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Connors Construction needs a piece of equipment that can be leased or purchased. The equipment costs $50. One option is borrow $50 from the local bank and use the money to buy the equipment. The other option is to lease the equipment. The company's balance sheet prior to the equipment purchase or lease is shown below:
Total liabilities and equity
What would the company's debt ratio if it chose to purchase the equipment? Round your answer to one decimal.
The company's debt ratio is %.
What would be the company's debt ratio if it leased the equipment and it could keep the lease off its balance sheet? Round your answer to one decimal.
If the company leases the asset and does not capitalize the lease, its debt ratio is %.
Is the company's financial risk any different whether the equipment is leased or purchased? Explain.
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