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	$	75	Current liabilities	$	30
Fixed assets		75	Long-term liabilities		40
			Total liabilities	$	70
			Stockholders' equity		80
Total assets	$	150	Total liabilities and stockholders' equity	$	150

  
The footnotes stated that the company had $25 million in annual capital lease obligations for the next 20 years.

a. Discount these annual lease obligations back to the present at a 7 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

Answer 1