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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.

Current Assets   75             Current Liabilities        35

Fixed Assets      75              Long Term Liabilities 20

                                             Total Liabilitites          55

                                             Stockholders equity    95

Total Assets      150             Total liabilities & stockholders equity 150

The footnotes stated that the company had $15 million in annual capital lease obligations for the next 15 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").)

PV of Lease Obligations ______________ millions


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 and total equity ratio for the original and revised balance sheets.(Input your answers as a percent rounded to 2 decimal places.

Asset Ratio      Original ____________%     Revised _______________%

Equity Ratio   Original _____________%    Revised ________________%

Solutions

Expert Solution

a. PV of lease obligations = $108 million

Explanations: PV @ 11%, 15 years = 7.191

Present value of lease payments = $15,000,000 * 7.191 = $107,865,000 or $108 million rounded.

b. Revised balance sheet

Balance Sheet (In $ millions)
Current Assets 75 Current Liabilities 35
Fixed Assets 75 Long term liabilities 20
Leased property under capital lease 108 Obligations under capital lease 108
Total Liabilities 163
Stockholder's equity 95
Total Assets 258 Total liabilities and Stockholder's equity 258

c. Asset Ratio:

Original:

Total debt = $55 million

Total asset = $150 million

Original Asset Ratio = $55 / $150 * 100 = 36.67%

Revised:

Total debt = $163 million

Total asset = $258 million

Revised Asset ratio = $163 / $258 * 100 = 63.18%

Equity Ratio:

Original:

Total debt = $55 million

Total equity = $95 million

Original Equity ratio = $55 / $95 * 100 = 57.89%

Revised:

Total debt = $163 million

Total equity = $95 million

Revised Equity ratio = $163 / $95 * 100 = 171.58%

ekkarill92 answered 1 year ago
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