4.5 Financing Lease Problem

You are given the following:

  • LCM, Inc. is going to lease some equipment for 15 years at an annual charge of $200,000 – payable at the end of each year.
  • There will be no salvage value
  • LCM’s borrowing rate is 5%.
  • The lease satisfies all the criteria of a Capital Lease.
  • The “Before” balance sheet is noted below.

To do:

  1. Fill-in LCM’s balance sheet and debt ratio at the lease’s inception.
  2. Question: What would the balance sheet look like one year into the lease (i.e., “year later”)?
    • Assume straight-line depreciation for the asset.
    • Remember: the lease obligation is amortized at 5%.
    • Assume that the borrowing rate and lease rates are the same.
    • This is a two-part question.
      • One part has to do with calculating the depreciated asset value of the lease.
      • The other part has to do with the amortized lease obligation. They are not the same.
      • Therefore, an adjustment will need to be made to the balance sheet in order to make it balance.


Before  Inception  Year Later Before  Inception  Year Later 
Current Assets $200 Current Liabilities $100
Leased Equipment Lease Obligation
Fixed Assets 1,800 Long- term Debt 900
Equity 1,000
Total Assets $2,000 Total Debt + Equity $2,000
Debt Ratio 50%



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Corporate Finance Copyright © 2023 by Kenneth S. Bigel is licensed under a Creative Commons Attribution 4.0 International License, except where otherwise noted.

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