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

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 Dfor an approximate answer but calculate your final answer using the formula and financial calculator methods.  

  
The footnotes stated that the company had $12 million in annual capital lease obligations for the next 20 years.

a. Discount these annual lease obligations back to the present at a 8 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?
  

In $ millions In $ millions Current assets $ 60 Current liabilities $ 20 Fixed assets 60 Long-term liabilities 30 Total liabilities $ 50 Stockholders' equity 70 Total assets $ 120 Total liabilities and stockholders' equity $ 120

Explanation / Answer

a. PV @8% ,20 years =9.8181 Present value of lease payments = $12 Million * 9.8181 =117.82Million b. The revised balance sheet is as below. ( $ in Million) Current Assets 60 Current Liabilities 20 Fixed Assets 60 Long-term liabilities 30 Leased Property under Capital Lease 117.82 Obligations under capital lease 117.82 Total liabilities 167.82 Stockholders equity 70 Total Assets 237.82 Total liabilities and stockholders equity 237.82 c. Total debt to total assets on original balance sheet = 50/120 = 41.67% Total debt to total assets on revised balance sheet = 167.82/237.82 = 70.57% d. Total debt to equity on original balance sheet = 50/70 = 71.43% Total debt to equity on original balance sheet = 167.82/70 = 239.74%

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