Question

# The Ellis Corporation has heavy lease commitments. Prior to SFAS No. 13, it merely footnoted lease...

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

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%

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