nt: Chapter 20 Hybrid Financing Assignment Score: S0.53% Save Exit Submit Assign
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nt: Chapter 20 Hybrid Financing Assignment Score: S0.53% Save Exit Submit Assignment for Grading Problem 20.04 Question 8 ot 9 Check My Work (No more tries available) Problem 20-4 Balance sheet effects of leasing Two textile companies, M cost of $250,000. McDaniel-Edwards obtained a 5-year, $250,000 loan at an 9% interest rate from its bank. Jordan-Hocking, on the ather hand, decided to from National Leasing for 5 years; an 9% return was built into the lease. The balance sheet for each company, before the set ia McDaniel- Edwards Manufacturing and Jordan-Hocking Hills, began operations with identical balance sheets. A year later, both required additional manufacturing capacity at a lease the requred $250,000 capacity The balance sheet for each company, before the asset increases, is as follows Debt $200,000 200,000 400,000 Equity Total assets $400,000 Total labilities and equity show the McDaniel-Edwards' balance sheet after the asset increase. Round your answers to two decim al places. Debt 450000.00 Equity 2.s 200000.00 Total 3.$ Total Babilities and 3.s Total assets 65.0 equity 650000.00 egrity 650000.00 Calculate McDaniel-Edwards new debt ratio, Round your answer to two decimal glaces 5. 2.25Explanation / Answer
(‘1) McDaniel – Edwards Balance Sheet after the Asset Increase
Assets
Amount ($)
Liabilities
($)
Beginning Balance- 400,000
Add: Asset Acquired 250,000
out of loan
650,000
Debt – 200,000
Add: Bank Loan 250,000
450,000
Equity
200,000
Total
650,000
Total
650,000
(‘2) McDaniel – Edwards new debt ratio
Debt Ratio = Debt / Total Asset
Debt Ratio = 450,000/650,000
Debt Ratio = 0.69
(‘3) Jordan Hocking Balance Sheet after the capitalisation of lease
Assets
Amount ($)
Liabilities
($)
Beginning Balance
400,000
Debt
200,000
Lease Asset
0
Equity
200,000
Present Value of Lease Payment
0
Total
400,000
Total
400,000
When the asset is financed through Off Balance Sheet Financing, the asset kept itself in the lessor balance sheet. It will not appear in lessee balance sheet.
Lessee report the lease payment as annual lease expense to use the asset. This methodology is used to keep debt equity ratio low.
(‘4) Jordan Hocking Balance Sheet after the capitalisation of lease
Fair value of Asset = $250,000
Interest rate implied in lease = 9 %
Present value of annuity for 5 year at 9 % = 3.88965
Annual Lease Payment = Fair Value of Asset / Present Value Factor
Annual Lease Payment = 250,000/3.88965
Annual lease payment = $64,273.11
Assets
Amount ($)
Liabilities
($)
Beginning Balance
400,000
Debt
200,000
Lease Asset
250,000
Equity
200,000
Present Value of Lease Payment
250,000
Total
650,000
Total
650,000
Assets
Amount ($)
Liabilities
($)
Beginning Balance- 400,000
Add: Asset Acquired 250,000
out of loan
650,000
Debt – 200,000
Add: Bank Loan 250,000
450,000
Equity
200,000
Total
650,000
Total
650,000
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