Finance 2 Exercises 19-2 and 19-3

19-2) Consider the data:Current assets $300 Debt $400Net fixed assets $500 Equity $400Total assets $800 Total claims $800Assume that RC’s tax rate is 40% and that the equipment’s depreciation would be $100 per year. If the company leased the asset on a 2-year lease, the payment would be $110 at the beginning of each year. If RC borrowed and bought, the bank would charge 10% interest on the loan. In either case, the equipment is worth nothing after 2 years and will be discarded. Should RC lease or buy the equipment?19-3) 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 an 8% interest rate from its bank. Hastings, on the other hand, decided to lease the required $50,000 capacity for 5 years, and an 8% return was built into the lease. The balance sheet for each company, before the asset increases, follows:Current assets $25,000 Debt $50,000Net fixed assets $125,000 Equity $100,000Total assets $150,000 Total claims $150,000Show 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.)Show how Hasting’s balance sheet would look immediately after the financing if it capitalized the lease.