The Ellis Corporation has heavy lease commitments. Prior to SFAS No. 13, it mere
ID: 2541400 • 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.
Current Assets 75 Current Liabilities 35
Fixed Assets 75 Long Term Liabilities 20
Total Liabilitites 55
Stockholders equity 95
Total Assets 150 Total liabilities & stockholders equity 150
The footnotes stated that the company had $15 million in annual capital lease obligations for the next 15 years.
a. Discount these annual lease obligations back to the present at a 11 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 ______________ millions
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 and total equity ratio for the original and revised balance sheets.(Input your answers as a percent rounded to 2 decimal places.
Asset Ratio Original ____________% Revised _______________%
Explanation / Answer
a. PV of lease obligations = $108 million
Explanations: PV @ 11%, 15 years = 7.191
Present value of lease payments = $15,000,000 * 7.191 = $107,865,000 or $108 million rounded.
b. Revised balance sheet
c. Asset Ratio:
Original:
Total debt = $55 million
Total asset = $150 million
Original Asset Ratio = $55 / $150 * 100 = 36.67%
Revised:
Total debt = $163 million
Total asset = $258 million
Revised Asset ratio = $163 / $258 * 100 = 63.18%
Equity Ratio:
Original:
Total debt = $55 million
Total equity = $95 million
Original Equity ratio = $55 / $95 * 100 = 57.89%
Revised:
Total debt = $163 million
Total equity = $95 million
Revised Equity ratio = $163 / $95 * 100 = 171.58%
Balance Sheet (In $ millions) Current Assets 75 Current Liabilities 35 Fixed Assets 75 Long term liabilities 20 Leased property under capital lease 108 Obligations under capital lease 108 Total Liabilities 163 Stockholder's equity 95 Total Assets 258 Total liabilities and Stockholder's equity 258Related Questions
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