The Ellis Corporation has heavy lease commitments. Prior to SFAS No. 13 , it mer
ID: 2713305 • 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:
The footnotes stated that the company h ad 14 million in annual captial lease obligations for the next 20 years.
a. discount these annual lease obligations back to the present at a 10 percent discount rate (round to the nearest million dollars).
b. Consruct a revised balance sheet that includes lease obligation, as in table 16-7
c. compute the total debt to total assets on the original and revised balance sheets.
d. compute total debt to equity on the original and revised balance sheets.
e. In an effecient capital market environemnt, should be the consequences of SFAS No. 13, as viewed in the answers to parts c and d, change stock prices and credit ratings?
f. comment on management's perception of market efficiency (the viewpoint of the financial officer).
Current assets $70 Current Liabilities $30 Fixed Assets 70 Long term liabilites 30 Total Assets 140 Total Liabilities 60 Stockholder's Equity 80 Total liabilities & Stockholders equity $140Explanation / Answer
Answer:a PV of Leases=$14,000,000*({1-[1/(1.10)20]}/0.10)
=$119189891.924 or $119 million
Answer:b
Answer:c Original:
Total debt=60
Total assets=140
=60/140*100=42.86%
Revised:
Total debts=179
Total assets=259
=179/259*100=69.11%
Answer:d Original:
Total debt=60
Total assets=80
=60/80*100=75%
Revised:
Total debts=179
Total assets=80
=179/80*100=223.75%
Answer:e No, the information was already known by financial anaylst before it was brought into the balance sheet.
Balance Sheet (In $ millions) Current Assets 70 Current liabilities 30 Fixed Asset 70 Long term liabilities 30 Leased Property under the capital lease 119 +1% Obligations under capital lease 119 +1% Total liabilities 179+1% Stockholder's equity 80 Total assets 259 +1% Total liabilities and stockholder's equity 259+1%Related Questions
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