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  Longterm 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").)

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?
Yes  
No 
As per rules I am answering the first 4 subparts of the question
1:
PV of annuity = Annuity*(11/(1+rate)^number of terms)/rate
=21*(11/1.1^20)/0.1
=178.78
=179 million
2:
In $ millions 
In $ millions 

Current assets 
$ 
55 
Current liabilities 
$ 
10 
Fixed assets 
55 
Longterm 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%
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