Two companies, Energen and Hastings Corporation, began operations with identical balance sheets. A year later, both required additional fixed assets 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:

a. Show the balance sheets for both firms after the asset increases, and calculate each firm’s new debt ratio assuming that the lease is not capitalized.

b. Show how Hastings’s balance sheet would look immediately after the financing assuming the lease is capitalized.

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