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	$	65	Current liabilities	$	20
Fixed assets		65	Long-term liabilities		35
			Total liabilities	$	55
			Stockholders' equity		75
Total assets	$	130	Total liabilities and stockholders' equity	$	130

  
The footnotes stated that the company had $23 million in annual capital lease obligations for the next 10 years.

a. Discount these annual lease obligations back to the present at a 12 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 million

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 %

Answer 1

a. PV of lease obligations = $130 million
Explanations: PV @ 12%, 10 years = 5.65
Present value of lease payments = $23,000,000 * 5.6502 = $129,955,129 or $130 million rounded.
b. Revised balance sheet
Balance Sheet (In $ millions)
Current Assets	65	Current Liabilities	20
Fixed Assets	65	Long term liabilities	35
Leased property under capital lease	130	Obligations under capital lease	130
		Total Liabilities	185
		Stockholder's equity	75
Total Assets	260	Total liabilities and Stockholder's equity	260
c. Asset Ratio:
Original:
Total debt = $55 million
Total asset = $130 million
Original Asset Ratio = $55 / $130 * 100 = 42.31%
Revised:
Total debt = $185 million
Total asset = $260 million
Revised Asset ratio = $185 / $260 * 100 = 71.15%
Equity Ratio:
Original:
Total debt = $55 million
Total equity = $75 million
Original Equity ratio = $55 / $75 * 100 = 73.33%
Revised:
Total debt = $185 million
Total equity = $75 million
Revised Equity ratio = $185 / $75 * 100 = 246.67%