Question: Question Workspace Check My Work eBook Balance Sheet Effects Two companies, Energen and Hastings Corporation, began operations with identical balance sheets. A year later, both

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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 $25,000. Energen obtained a 5-year, $25,000 loan at a 10% interest rate from its bank. Hastings, on the other hand, decided to lease the required $25,000 capacity for 5 years, and a 10% 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

  1. 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. Round the monetary values to the nearest dollar and percentage values to the nearest whole number.
    Energen Corporation 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 Equity
    Total assets $ Total claims $
    Debt ratio: %
  2. Show how Hastings's balance sheet would look immediately after the financing assuming the lease is capitalized. Round the monetary values to the nearest dollar and percentage value to the nearest whole number.
    Hastings Corporation Balance Sheet (Capitalizes lease)
    Current assets $ Debt $
    Value of leased asset PV of lease payments
    Fixed assets Equity
    Total assets $ Total claims $
    Debt ratio: %

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