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 $300,000. McDaniel-Edwards obtained a 5-year, $300,000 loan at an 8% interest rate from its bank. Jordan-Hocking, on the other hand, decided to lease the required $300,000 capacity from National Leasing for 5 years; an 8% return was build into the lease. The balance sheet for each company, before the asset increase, is as follows:

		Debt	$300,000
		Equity	$300,000
Total assets	$600,000	Total liabilities and equity	$600,000

1. Show the balance sheet of each firm after the assets, and calculate each firm's new debt ratio. (Assume that Jordan-Hocking's lease is kept off the balance sheet.) Round your answers to the whole number.

   Debt/assets ratio for McDaniel-Edwards = %

   Debt/assets ratio for Jordan-Hocking = %

2. Show how Jordan-Hocking's balance sheet would have looked immediately after the financing if had capitalized the lease. Round your answer to the whole number.

   %

3. Would the rate of return (1) on assets and (2) on equity be after by the choice of financing? If so, how?

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