Financial Management: Theory and Practice 13th Ed. Chapter 18 Problem 18-3 Two c

Question

Financial Management: Theory and Practice 13th Ed.
Chapter 18 Problem 18-3


Two companies, Energen and Hastings Corp., began operations with identical balance sheets. A year later, both required additional manufacturing capacity at a cost of $50,000. Energen obtained a 5-year, $50,000 loan at an 8% interest rate from its bank. Hastings, on the other hand, decided to lease the required $50,000 capacity for 5 years, and an 8% return was built into the lease. The balance sheet for each company, before the asset increases, follows:

$50,000 (debt)

$100,000 (equity)

$150,000 Total claims $150,000 Total assets

a. 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.)

b. Show how Hastings's balance sheet would look immediately after the financing if it capitalized the lease.

Explanation / Answer

Energen's Balnce sheet

Debt

100000

Assets

200000

Equity

100000

200000

200000

Hasting's Balnce sheet

Debt

10000

Assets

150000

Equity

100000

150000

150000

Debt

100000

Assets

200000

Equity

100000

200000

200000

Energen's Balnce sheet

Debt

100000

Assets

200000

Equity

100000

200000

200000

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