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Debt Ration and Financial Risk

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?
b. What would the new debt ratio be if the machine were leased? If it is purchased?
c. Is the financial risk of the business different under the two acquisition alternatives?

Solution Preview

a. What is Suncoast's current debt ratio?
Debt ratio= Total debt/Total Assets
=400000/ 1000000
=40%.

b. What would the new debt ratio be if the machine were ...

$2.19