Balance sheet effects of leasing Two textile companies, McDaniel-Edwards Manufac
ID: 2613000 • Letter: B
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 $225,000. McDaniel-Edwards obtained a 5-year, $225,000 loan at an 9% interest rate from its bank. Jordan-Hocking, on the other hand, decided to lease the required $225,000 capacity from National Leasing for 5 years; an 9% return was built into the lease. The balance sheet for each company, before the asset increases, is as follows:
Show the McDaniel-Edwards' balance sheet after the asset increase. Round your answers to two decimal places.
Calculate McDaniel-Edwards' new debt ratio. Round your answer to two decimal places.
5. %
Show the Jordan-Hocking's balance sheet after the asset increase. (Assume lease is kept off the balance sheet.) Round your answers to two decimal places.
Calculate Jordan-Hocking's new debt ratio. Round your answers to two decimal places.
10. %
Show how Jordan-Hocking's balance sheet would have looked immediately after the financing if it had capitalized the lease. Round your answers to two decimal places.
Debt $200,000 Equity 200,000 Total assets $400,000 Total liabilities and equity $400,000Explanation / Answer
Debt =200,000 +225,000
= 425,000
Equity will remain the same. Equity = 200,000.
Total assets will increase.
Total assets 400,000 +225,000
= 625,000
= 425,000/625,000
= 68%
Debt =200,000 +225,000
= 425,000
Equity will remain the same. Equity = 200,000.
Total assets will increase.
Total assets 400,000 +225,000
= 625,000
Debt ratio = total debt / total assets
= 425,000/625,000
= 68%
Assets =400,000
Value of leased assets = 225,000
Total assets= 625,000
Debt = 200,000
Equity =200,000
Pv of leased payment = 225,000
Total liabilities and equity = 625000
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