Question

Balance sheet effects of leasing Two textile companies, McDaniel-Edwards Manufacturing and Jordan-Hocking Mills, began operations with identical balance sheets. A year later both required additional manufacturing capacity at a cost of $150,000. McDaniel-Edwards obtained a 5-year, $150,000 loan at a 7% interest rate from its bank. Jordan-Hocking, on the other hand, decided to lease the required $150,000 capacity from National Leasing for 5 years; an 7% return was build into the lease. The balance sheet for each company, before the asset increase, is as follows: Debt $150,000 Equity $150,000 Total assets $300,000 Total liabilities and equity $300,000 Show the balance sheet of each firm after the assets, and calculate each firm's new debt ratio. (Assume that Jordan-Hocking's lease is kept off the balance sheet.) Round your answers to the whole number. Debt/assets ratio for McDaniel-Edwards = % Debt/assets ratio for Jordan-Hocking = % Show how Jordan-Hocking's balance sheet would have looked immediately after the financing if had capitalized the lease. Round your answer to the whole number. %

Answer 1