The Ellis Corporation has heavy lease commitments. Prior to SFAS No. 13 , it mer
ID: 2595937 • Letter: T
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.
The footnotes stated that the company had $31 million in annual capital lease obligations for the next 10 years.
a. Discount these annual lease obligations back to the present at a 6 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").)
Current Assets ________
Fixed Assets ________
Leased property under capital lease ________
Total assets ________
Current Liabilities ________
Long-term liabilities ________
Obligations under capital lease ________
Total liabilities ________
Stockholders' equity ________
Total liabilities and Stockholders' equity ________
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 ________%
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?
Yes or No?
BALANCE SHEET In $ millions Current assets $ 65 Current liabilities $ 25 Fixed assets 65 Long-term liabilities 35 Total liabilities $ 60 Stockholders' equity 70 Total assets $ 130 Total liabilities and stockholders' equity $ 130Explanation / Answer
Answer A: present value formula : Cash flow /( 1 + interest rate) ^ ( no of years)
PV of all lease obligations 228 million
Answer B:
Answer C: original : 60/130 = 0.461 or 46.1%
Revised : 288/358 = 0.6368 or 63.68%
Answer D:Original : 60/70 = 0.8571 or 85.71%
Revised : 288/70 = 4.1142 or 411.42%
Answer: No it shouldnt effect. In the efficient capital market this information was already available to everyone.
year 1 2 3 4 5 6 7 8 9 10 Cash flow every year 31 31 31 31 31 31 31 31 31 31 present value 29.24528 27.58989 26.0282 24.5549 23.165 21.85378 20.61677 19.44978 18.34885 17.31024 PV of the all obligations 228.1627Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.