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The Ellis Corporation has heavy lease commitments. Prior to SFAS No. 13, it merely footnoted lease...

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 $ 10
Fixed assets 55 Long-term liabilities 35
Total liabilities $ 45
Stockholders' equity 65
Total assets $ 110 Total liabilities and stockholders' equity $ 110

  
The footnotes stated that the company had $21 million in annual capital lease obligations for the next 20 years.


a. Discount these annual lease obligations back to the present at a 10 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").)


  PV of lease obligations:


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").)
  

Balance Sheet (in $ millions)
Current assets Current liabilities
Fixed assets Long-term liabilities
Leased property under capital lease Obligations under capital lease
Total liabilities $0
Stockholders' equity
Total assets $0 Total liabilities and Stockholders' equity $0


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.)   

Original %
Revised %

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.)

Original %
Revised %

Solutions

Expert Solution

Calculate the annual lease obligation as follows:

Annual lease obligation = Annual lease payment * PVAF(10%,20)

= $21 * 8.514

=$179.

Therefore, the annual lease obligation is $179.

-------------------------------------------------------------------------

Calculate the revised balance sheet as follows:

Formulas:

jeff jeffy answered 1 year ago
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