Problem 19-3 Balance Sheet Effects Two companies, Energen and Hastings Corporati
ID: 2730591 • Letter: P
Question
Problem 19-3
Balance Sheet Effects
Two companies, Energen and Hastings Corporation, began operations with identical balance sheets. A year later, both required additional fixed assets at a cost of $50,000. Energen obtained a 5-year, $50,000 loan at a 7% interest rate from its bank. Hastings, on the other hand, decided to lease the required $50,000 capacity for 5 years, and a 7% return was built into the lease. The balance sheet for each company, before the asset increases, follows:
Show the balance sheets for both firms after the asset increases, and calculate each firm's new debt ratio. (Assume that the lease is not capitalized.) Round the debt ratios to the nearest whole percentage.
Debt ratio = ___________%
Debt ratio = _____________ %
Show how Hastings's balance sheet would look immediately after the financing if it capitalized the lease. Round the debt ratio to the nearest whole percentage.
Debt ratio =_____
%
Current assets $ 25,000 Debt $ 50,000 Fixed assets 125,000 Equity 100,000 Total assets $150,000 Total claims $150,000Explanation / Answer
Energen Balance Sheet (Owns new assets) Current assets 25000 Debt 100000 Fixed assets 175000 Equity 100000 Total assets 200000 Total claims 200000 Debt ratio total liabilities/total assets 0.5 Hastings Corporation Balance Sheet (Leases as operating lease) Current assets 25000 Debt 50000 Fixed assets 125000 Equity 100000 Total assets 150000 Total claims 150000 Debt ratio total liabilities/total assets 0.3333333 Hastings Corporation Balance Sheet (Capitalizes lease) Current assets_______ 25000 Debt_________ 50000 Value of leased asset_____ 50000 Lease Obligation 50000 Fixed assets________ 125000 Equity__________ 100000 Total assets_______ 200000 Total claims_______ 200000 Debt Ratio total liabilities/total assets 0.5