Question

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 $25,000. Energen obtained a 5-year, $25,000 loan at a 10% interest rate from its bank. Hastings, on the other hand, decided to lease the required $25,000 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	$150,000

1. Show the balance sheets for both firms after the asset increases, and calculate each firm's new debt ratio assuming that the lease is not capitalized. Round the monetary values to the nearest dollar and percentage values to the nearest whole number.

   Energen Corporation Balance Sheet (Owns new assets)
   Current assets	$		Debt	$
   Fixed assets			Equity
   Total assets	$		Total claims	$

   
   Debt ratio:   %

   Hastings Corporation Balance Sheet (Leases as operating lease)
   Current assets	$		Debt	$
   Fixed assets			Equity
   Total assets	$		Total claims	$

   
   Debt ratio:   %
   
2. Show how Hastings's balance sheet would look immediately after the financing assuming the lease is capitalized. Round the monetary values to the nearest dollar and percentage value to the nearest whole number.

   Hastings Corporation Balance Sheet (Capitalizes lease)
   Current assets	$		Debt	$
   Value of leased asset			PV of lease payments
   Fixed assets			Equity
   Total assets	$		Total claims	$

   
   Debt ratio:   %

Answer 1