20-1 LEASING Connors Construction needs a piece of equipment that can be leased or purchased. The equipment costs $100. One option is to borrow $100 from the local bank and use the money to buy the equipment. The other option is to lease the equipment. If Connors chooses to lease the equipment, it will not capitalize the lease on the balance sheet. Following is the company's balance sheet prior to the purchase or leasing of the equipment.
Current assets $300 Debt $400
Fixed assets 500 Equity 400
Total assets $800 Total liabilities and equity $800
What would be the company's debt ratio if it chose to purchase the equipment? What would be the company's debt ratio if it chose to lease the equipment? Would the company's financial risk be different depending on whether the equipment was leased or purchased? Explain.
20-2 WARRANTS Gregg Company recently issued two types of bonds. The first issue consisted of 20-year straight (no warrants attached) bonds with an 8% annual coupon. The second issue consisted of 20-year bonds with a 6% annual coupon with warrants attached. Both bonds were issued at par ($1,000). What is the value of the warrants that were attached to the second issue?
20-3 CONVERTIBLES Petersen Securities recently issued convertible bonds with a $1,000 par value. The bonds have a conversion price of $40 a share. What is the bonds' conversion ratio, CR?
The solution explains some questions relating to leasing, warrants and convertibles