Answered step by step
Verified Expert Solution
Question
1 Approved Answer
3. Two companies, CDC and Kaizen began operations with identical balance sheets. A year later both required additional manufacturing capacity at a cost of $400,000.
3. Two companies, CDC and Kaizen began operations with identical balance sheets. A year later both required additional manufacturing capacity at a cost of $400,000. CDC obtained a 5-year, $400,000 loan at an 8% interest rate from its bank. Kaizen, on the other hand, decided to lease the required $400,000 capacity from National Leasing for 5 years; an 8% return was built into the lease. The balance sheet for each company, before the asset increases, is as follows: Debt $400,000 Equity 400,000 Total assets $800,000 Total liabilities and equity $800,000 a) Show the balance sheet of each firm after the asset increase and calculate each firms new debt to asset ratio. (Assume that Kaizen's lease is kept off the balance sheet.) b) Show how Kaizen's balance sheet would have looked immediately after the financing if it had capitalized the lease. c) Would the rate of return (1) on assets and (2) on equity be affected by the choice of financing? If so, how
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started