PLEASE ANSWER ALL 17 QUESTIONS Balance sheet effects of leasing Two textile comp
ID: 2613010 • Letter: P
Question
PLEASE ANSWER ALL 17 QUESTIONS
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
Answer:
a. Balance sheets before lease is capitalized:
McDaniel-Edwards Balance Sheet (thousands of dollars):
Debt $200
Equity 200
Total liabilities
Total assets $400 and equity $400
Debt/assets ratio = $200/$400 = 50%.
Jordan-Hocking Balance Sheet (thousands of dollars):
Debt $200
Equity 200
Total liabilities
Total assets $400 and equity $400
Debt/assets ratio = $200/$400 = 50%.
b. Balance sheet after lease is capitalized:
McDaniel-Edwards Balance Sheet:
Debt $1 C
Equity 2 C
Total liabilities
Total assets $3 C and equity $4 C
Debt/assets ratio = $1/$3 = 33.33%.
Jordan-Hocking Balance Sheet :
Debt $6 C
Equity 7 C
Total liabilities
Total assets $8 C and equity $9 C
Debt/assets ratio = $6/$8 =75%.
Jordan-Hocking Balance Sheet :
Assets $11 Debt $12
Value of leased asset 13 PV of lease payments 14
Equity 15
Total liabilities
Total assets $16 and equity $17
Debt/assets ratio = $26/$16 = 1.625%.
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