The Ellis Corporation has heavy lease commitments. Prior to SFAS No. 13 , it mer
ID: 2738110 • 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.
The footnotes stated that the company had $27 million in annual capital lease obligations for the next 10 years.
Discount these annual lease obligations back to the present at a 9 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").)
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").)
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.)
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.)
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?
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.
Explanation / Answer
Answer a.
PV of Lease = $27,000,000 * {1-(1/1.09)^10}/0.09 = $173,276,757.93
PV of Lease = $173 Million
Answer b.
Balance Sheet
Current Assets
85
Current liabilities
30
Fixed Assets
85
Long term liabilities
50
Leased property under
Capital lease
173
Obligation under
Capital lease
173
Total Liabilities
253
Stockholders’ Equity
90
Total Assets
343
Total Liabilities and shareholders’ equity
343
Answer c.
Original :
Total debts / Total Assets = 80 / 170 = 0.4706 = 47.06%
Revised :
Total debts / Total Assets = 253 / 343 = 0.7376 = 73.76%
Answer d.
Original :
Total debts / Total Assets = 80 / 90 = 0.8889 = 88.89%
Revised :
Total debts / Total Assets = 253 / 90 = 2.8111 = 281.11%
Answer e.
No, the information was already known by financial analysts before it was brought into the balance sheet.
Balance Sheet
Current Assets
85
Current liabilities
30
Fixed Assets
85
Long term liabilities
50
Leased property under
Capital lease
173
Obligation under
Capital lease
173
Total Liabilities
253
Stockholders’ Equity
90
Total Assets
343
Total Liabilities and shareholders’ equity
343
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