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	$	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

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
		Stockholders' equity
Total assets		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
	No

Answer 1

As per rules I am answering the first 4 subparts of the question

1:

PV of annuity = Annuity*(1-1/(1+rate)^number of terms)/rate

=21*(1-1/1.1^20)/0.1

=178.78

=179 million

2:

In $ millions			In $ millions
Current assets	$	55	Current liabilities	$	10
Fixed assets		55	Long-term liabilities		35
Leased property under capital leas		179	Obligations under capital lease		179
			Total liabilities	$	224
			Stockholders' equity		65
Total assets	$	289	Total liabilities and stockholders' equity	$	289

  

3: Original debt/Asset ratio = 45/110

=40.91%

Revised Debt/Asset ratio= 224/289

=77.51%

4:Original Debt/Equity ratio = 45/65

= 69.23%

Revised Debt/Equity = 224/65

= 344.62%