Problem 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 $50,000. Energen obtained a 5-year, $50,000 loan at a 7% interest rate from its bank. Hastings, on the other hand, decided to lease the required $50,000 capacity for 5 years, and a 7% return was built into the lease. The balance sheet for each company, before the asset increases, follows:

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

Show the balance sheets for both firms after the asset increases, and calculate each firm's new debt ratio. (Assume that the lease is not capitalized.) Round the debt ratios to the nearest whole percentage.

Energen Balance Sheet (Owns new assets)
Current assets	$ ___________		Debt	$ ____________-
Fixed assets	_____________		Equity	___________
Total assets	$ ___________		Total claims	$ ____________

Debt ratio = ___________%

Hastings Corporation Balance Sheet (Leases as operating lease)
Current assets	$ ______________		Debt	$ _____________
Fixed assets	{cke__________		Equity	_____________
Total assets	$ ____________		Total claims	$ ______________

Debt ratio = _____________ % Show how Hastings's balance sheet would look immediately after the financing if it capitalized the lease. Round the debt ratio to the nearest whole percentage.

Hastings Corporation Balance Sheet (Capitalizes lease)
Current assets_______	$		Debt_________	$
Value of leased asset_____			Lease Obligation
Fixed assets________			Equity__________
Total assets_______	$		Total claims_______	$

Debt ratio =_____

%