Question

The Ellis Corporation has heavy lease commitments. Prior to SFAS No. 13, it merely footnoted lease obligations in the balance sheet, which appeared as follows: Use Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. In $ millions In $ millions Current assets $ 55 Current liabilities $ 20 Fixed assets 55 Long-term liabilities 25 Total liabilities $ 45 Stockholders' equity 65 Total assets $ 110 Total liabilities and stockholders' equity $ 110 The footnotes stated that the company had $29 million in annual capital lease obligations for the next 20 years. a. Discount these annual lease obligations back to the present at a 11 percent discount rate. (Do not round intermediate calculations. Round your answer to the nearest million. Input your answer in millions of dollars (e.g., $6,100,000 should be input as "6").) b. Construct a revised balance sheet that includes lease obligations. (Do not round intermediate calculations. Round your answers to the nearest million. Input your answer in millions of dollars (e.g., $6,100,000 should be input as "6").) c. Compute the total debt to total asset ratio for the original and revised balance sheets. (Input your answers as a percent rounded to 2 decimal places.) d. Compute the total debt to total equity ratio for the original and revised balance sheets. (Input your answers as a percent rounded to 2 decimal places.) e. In an efficient capital market environment, should the consequences of SFAS No. 13, as viewed in the answers to parts c and d, change stock prices and credit ratings?

Answer 1

1		PV@11% for 20 years
PV of leases	29,000,000	7.9633	230,935,700	231	million

revised balance sheet
	revised balance sheet
Current assets	55	Current liabilities	20
Fixed assets	55	Long-term liabilities	25
Leased propertyunder capital lease	231	Obligations undercapital lease	231
		Total liabilities	276
		Stockholders' equity	65
Total assets	341	Total liabilities andStockholders' equity	341

c
Original
Total debt/Total assets	45/110	40.91%
Revised
Total debt/Total assets	276/341	80.94%
d
Total debt/Total equity	45/65	69.23%
Revised
Total debt/Total equity	276/65	424.62%
e
No, the information was already known by financial analysts before it was brought into the balance sheet