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 $ 60 Current liabilities $ 20 Fixed assets 60 Long-term liabilities 30 Total liabilities $ 50 Stockholders' equity 70 Total assets $ 120 Total liabilities and stockholders' equity $ 120
The footnotes stated that the company had $12 million in annual capital lease obligations for the next 20 years.
a. Discount these annual lease obligations back to the present at a 8 percent discount rate
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?