Two companies, Energen and Hastings Corporation, began operations with identical
ID: 2717155 • Letter: T
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:
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.
Debt ratio = %
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.
Debt ratio = %
Explanation / Answer
Energen
Loan amount = $ 25000
Loan Period = 5 years
Rate of interest =9%
Balance Sheet Prior to taking Loan
Current Assets
$ 25,000
Debt
$ 50,000
Fixed Assets
$ 125,000
Equity
$ 100,000
Total Assets
$ 150,000
Total Claims
$ 150,000
Balance Sheet after taking Loan
Current Assets
$ 25,000
Debt (50000+25000)
$ 75,000
Fixed Assets (125000+25000)
$ 150,000
Equity
$ 100,000
Total Assets
$ 175,000
Total Claims
$ 175,000
Debt Ratio = Total Debt / Total Assets = $ 75,000 / $ 175000
= 0.428571 or 42.8571%
Debt Ratio = 42.86% (rounded off)
Hastings Corporation
Taken the fixed asset on a lease
Lease amount =$ 25000
Lease Period = 5 years
Return built into lease = 9%
Balance Sheet Prior to Taking Lease
Current Assets
$ 25,000
Debt
$ 50,000
Fixed Assets
$ 125,000
Equity
$ 100,000
Total Assets
$ 150,000
Total Claims
$ 150,000
Balance Sheet after taking the asset on an operating lease
Current Assets
$ 25,000
Debt
$ 50,000
Fixed Assets
$ 125,000
Equity
$ 100,000
Total Assets
$ 150,000
Total Claims
$ 150,000
Debt Ratio = Total Debt / Total Assets = $ 50,000/$ 150,000
= 0.33333 or 33.33% (rounded off)
If the Lease is capitalized, then the balance sheet of the company will be
Current Assets
$ 25,000
Debt
$ 50,000
Value of Leased Asset
$ 25,000
Lease Obligation
$ 25,000
Fixed Assets
$ 125,000
Equity
$ 100,000
Total Assets
$ 175,000
Total Claims
$ 175,000
Debt Ratio = Total Debt / Total Assets
= ($50,000 + $25,000)/$175,000
= $ 75,000 / $ 175,000
= 0.428571 or 42.86% (rounded off)
Current Assets
$ 25,000
Debt
$ 50,000
Fixed Assets
$ 125,000
Equity
$ 100,000
Total Assets
$ 150,000
Total Claims
$ 150,000
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