Problem 19-03 Balance Sheet Effects Two companies, Energen and Hastings Corporat
ID: 2781602 • Letter: P
Question
Problem 19-03
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 10% interest rate from its bank. Hastings, on the other hand, decided to lease the required $50,000 capacity for 5 years, and a 10% 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 = %
Problem 19-03
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 10% interest rate from its bank. Hastings, on the other hand, decided to lease the required $50,000 capacity for 5 years, and a 10% return was built into the lease. The balance sheet for each company, before the asset increases, follows:
Current assets $25,000 Debt $50,000 Fixed assets 125,000 Equity 100,000 Total assets $150,000 Total claims $150,000Show 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.
EnergenBalance Sheet (Owns new assets) Current assets $ Debt $ Fixed assets Equity Total assets $ Total claims $
Debt ratio = %
Balance Sheet (Leases as operating lease) Current assets $ Debt $ Fixed assets Equity Total assets $ Total claims $
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.
Balance Sheet (Capitalizes lease) Current assets $ Debt $ Value of leased asset Lease Obligation Fixed assets Equity Total assets $ Total claims $
Debt ratio = %
Explanation / Answer
a.Balance sheets after asset increases before lease capitalized
Energen Balance-sheet
Current Assets- $25,000 Debt- $100,000
Fixed Assets- $175,000 ($50,000 + $50,000)
($125,000 + $50,000) Equity- $100,000
Total Assets $200,000 Total claims $200,000
Debt Ratio = Debt/Total assets
= $100,000/$200,000 = 50%
Hasting Corporation Balance-sheet
Current Asse $25,000 Debt $50,000
Fixed Assets $125,000 Equity $100,000
Total Assets $150,000 Total claims $150,000
Debt Ratio=Debt/total assets
=$50,000/$150,000 = 33%
b. Hasting Corporation Balance-sheet after Lease capitalization
Hasting Corporation Balance-sheet
Current Assets $25,000 Debt $50,000
Fixed Assets $125,000 PV of lease Payment $50,000
Leased Assets $50,000 Equity $100,000
Total Assets $200,000 Total claims $200,000
Debt Ratio = Debt/Total assets
= $50,000/$200,000 = 50%
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