Sun Coast Healthcare Plans To Acquire A New X-Ray Machine

Sun Coast Healthcare Is Planning To Acquire A New X Ray Machine That

Sun Coast 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 bank. Sun Coast’s current financial statement 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.

Analyze the financial implications of this acquisition by addressing the following questions:

  1. Calculate Sun Coast’s current debt ratio.
  2. Determine the debt ratio if the machine is leased versus if it is purchased.
  3. Explain whether the financial risk of the business differs under the two alternatives.

Paper For Above instruction

The decision to acquire new equipment is crucial for healthcare organizations such as Sun Coast Healthcare. It involves considering the financial implications, particularly how to finance the acquisition and how this will influence the company’s leverage and risk profile. This paper explores these issues by analyzing the company's current financial ratios, the impact of leasing versus purchasing on the debt ratio, and the associated financial risks.

Firstly, computing the current debt ratio provides a baseline for understanding Sun Coast's financial leverage. The debt ratio is calculated as total debt divided by total assets. Given the balance sheet figures: total debt is $400,000, and total assets are $1,000,000. Therefore, the current debt ratio is:

Current Debt Ratio = Total Debt / Total Assets = $400,000 / $1,000,000 = 0.40 or 40%.

This indicates that 40% of Sun Coast's assets are financed through debt, signaling a moderate leverage level aligned with typical industry standards in healthcare institutions.

Secondly, assessing the impact of leasing versus purchasing on the debt ratio is essential. If the X-ray machine is leased through an operating lease, it does not appear as a liability on the balance sheet, and therefore, the debt ratio remains unchanged at 40%. Leasing typically does not increase debt because lease obligations are considered off-balance-sheet financing under operating lease accounting standards.

In contrast, purchasing the machine involves taking out a loan to finance the purchase. Assuming the entire cost of $200,000 is financed through a bank loan, the company's liabilities increase by this amount. The new total debt would then be:

  • Original debt: $400,000
  • Add: Loan for the machine: $200,000

Total new debt: $600,000. The new total assets would be:

  • Original assets: $1,000,000
  • Add: Cost of the machine: $200,000

Now, total assets increase to $1,200,000. The new debt ratio accordingly is:

Debt Ratio = New Total Debt / New Total Assets = $600,000 / $1,200,000 = 0.50 or 50%.

This indicates an increased leverage, suggesting the company's financial risk is heightened when purchasing the equipment due to increased debt obligations.

Finally, whether this change in leverage influences the overall financial risk depends on the context of the company's operational stability and the healthcare sector’s typical leverage. Generally, higher debt ratios imply greater financial risk, particularly if revenue streams become unstable. Therefore, purchasing the equipment may increase the company's financial vulnerability compared to leasing, which preserves lower debt levels and maintains flexible financial positioning.

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