Problem 20-4 Balance sheet effects of leasing Two textile companies, McDaniel-Ed
ID: 2748846 • Letter: P
Question
Problem 20-4
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 $125,000. McDaniel-Edwards obtained a 5-year, $125,000 loan at an 11% interest rate from its bank. Jordan-Hocking, on the other hand, decided to lease the required $125,000 capacity from National Leasing for 5 years; an 11% return was built into the lease. The balance sheet for each company, before the asset increases, is as follows:
Show the McDaniel-Edwards' balance sheet after the asset increase. Round your answers to two decimal places.
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.
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.
Debt $200,000 Equity 200,000 Total assets $400,000 Total liabilities and equity $400,000Explanation / Answer
MacDeniel-Edware's Balance Sheet. 1 Debt 325000 2 Equity 200000 3. Total Assets 525000 4 Total Liability and Equity 525000 Debt to Equity Ratio 1.63 5. Debt to total Liabilities 61.90% Jordan-Hocking's Balance Sheet. 6 Debt 200000 7 Equity 200000 8. Total Assets 4000000 9 Total Liability and Equity 400000 Debt to Equity Ratio 1.00 10.Debt to total Liabilities 50.00% After Capitalisation Jordan-Hocking's Balance Sheet. 11.Assets 400000 12 Debt 232602.6 13. Value of Leased Assets 125000 14 PV of Lease Payments 92397.43 Equity 200000 16. Total Assets 525000 15 Total Liability and Equity 525000 Annual Year Payment Present value at 11% 1 25000 22522.52 2 25000 20290.56 3 25000 18279.78 4 25000 16468.27 5 25000 14836.28 Total 92397.43
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.