19-3 Balance Sheet Effects:

Two companies, Energen and Hastings Corporation, began operations with identical balance sheets. A year later, both required additional fixed assets at a cost of $100,000. Energen obtained a 5-year, loan at an 6% interest rate from its bank. Hastings, on the other hand, decided to lease the require $100,000 capacity for 5 years, and an 6% return was built into the lease. The balance sheet for each company, before the asset increases, follows:

Current assets 35,000 Debt 60,000

Fixed assets 115,000 Equity 90,000

Total assets 150,000 Total claims 150,000

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.