Balance sheet effects of leasing

Two textile companies, McDaniel-Edwards Manufacturing and Jordan-Hocking Mills, began operations with identical balance sheets. A year later, both required additional manufacturing capacity at a cost of $275,000. McDaniel-Edwards obtained a 5-year, $275,000 loan at an 8% interest rate from its bank. Jordan-Hocking, on the other hand, decided to lease the required $275,000 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	$200,000
			Equity	200,000
Total assets	$400,000		Total liabilities and equity	$400,000

Show the McDaniel-Edwards' balance sheet after the asset increase. Round your answers to two decimal places.

			Debt	1. $ {C}
			Equity	2. $ {C}
Total assets	3. $ {C}		Total liabilities and equity	4. $ {C}

Calculate McDaniel-Edwards' new debt ratio. Round your answer to two decimal places. 5. %

Show the Jordan-Hocking's balance sheet after the asset increase. (Assume lease is kept off the balance sheet.) Round your answers to two decimal places.

			Debt	6. $ {C}
			Equity	7. $ {C}
Total assets	8. $ {C}		Total liabilities and equity	9. $ {C}

Calculate Jordan-Hocking's new debt ratio. Round your answers to two decimal places. 10. %

Show how Jordan-Hocking's balance sheet would have looked immediately after the financing if it had capitalized the lease. Round your answers to two decimal places.

Assets	11. $		Debt	12. $
Value of leased asset	13. $		PV of lease payments	14. $
			Equity	15. $
Total assets	16. $		Total liabilities and equity	17. $