Two companies, Energen and Hastings Corporation, began operations with identical

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 an 8% interest rate from its bank. Hastings, on the other hand, decided to lease the required $25,000 capacity for 5 years, and an 8% return was built into the lease. The balance sheet for each company, before the asset increases, follows:

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 = ? %

Current assets $  25,000 Debt $  50,000 Fixed assets 125,000 Equity 100,000 Total assets $150,000 Total claims $150,000

Explanation / Answer

Answer:

a)

b) Operating leese does not increse the asset or liability. The leese amount is charged to income statement. The leesed asset is returned to lessor at the end of leese period.

c) Capital leese increses the total asset and liability by the leese amount which is the present value of the leese payment, which is $25,000.

Energen
Balance Sheet (Owns new assets Assets in$ Liabilities in$ Current assets 25,000 Debt 75,000 ($50,000+25,000) ($125,000+25,000) Fixed assets 1,50,000 Equity 1,00,000 Total assets 1,75,000 Total claims 1,75,000 Debt Ratio = Debt/Total Claims 42.86%

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