1. Carolina Trucking Company (CTC) is evaluating a potential lease agreement on a truck that costs $40,000 and falls into the MACRS 3-year class. The applicable MACRS depreciation rates are 0.33, 0.45, 0.15, and 0.07. The loan rate would be 10 percent, if CTC decided to borrow money and buy the asset rather than lease it. The truck has a 4-year economic life, and its estimated residual value is $10,000. If CTC buys the truck, it would purchase a maintenance contract that costs $1,000 per year, payable at the end of each year. The lease terms, which include maintenance, call for a $10,000 lease payment at the beginning of each year. CTC's tax rate is 40 percent. Should the firm lease or buy? [14]
2. Connors Construction needs a piece of equipment that can either be leased or purchased. The equipment costs $100. One opinion 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 would not capitalize the lease on the balance sheet. Below 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 Liability and assets $800

1. What would be the company's debt ratio if it chose to purchase the equipment?
2. What would be the company's debt ratio if it chose to lease the equipment?
3. Would the financial risk be different depending on whether the equipment is leased or purchased?