Question

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 9% interest rate from its bank. Hastings, on the other hand, decided to lease the required $25,000 capacity for 5 years, and a 9% 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 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.

Energen 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 = % 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. Hastings Corporation Balance Sheet (Capitalizes lease) Current assets $ Debt $ Value of leased asset Lease Obligation Fixed assets Equity Total assets $ Total claims $ Debt ratio = %

Answer 1