19-3 Balance Sheet Effects: Two companies, Tweedledee and Tweedledum, began operations with identical balance sheets. A...

19-3 Balance Sheet Effects: Two companies, Tweedledee and Tweedledum, began operations with identical balance sheets. A year later, both required additional fixed assets at a cost of $75,000. Tweedledee obtained a 5-year, loan at 46% interest rate from its bank. Tweedledum, on the other hand, decided to lease the require $75,000 capacity for 5 years, and a 4% return was built into the lease. The balance sheet for each company, before the asset increases, follows:

Current assets 42,000 Debt 75,000

Fixed assets 178,000 Equity 145,000

Total assets 220,000 Total claims 220,000

a. 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.

b. Show how Tweedledum balance sheet would look immediately after the financing assuming the lease is capitalized. What would be its debt ratio?

Expert Solution

jeff jeffy answered 2 years ago

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