The Ellis Corporation has heavy lease commitments. Prior to SFAS No. 13, it merely footnoted lease obligations in the balance sheet which appears below:
|
In Millions
|
|
|
|
| Current Assets |
$70 |
Current Liabilities |
$30 |
| Fixed Assets |
$70 |
Long-term liabilities |
$30 |
|
|
Total Liabilities |
$60 |
|
|
Stockholders' Equity |
$80 |
| Total Assets |
$140 |
Total Liability and Stockholders' equity |
$140 |
The footnotes state that the company had $14 million in annual capital 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).
b. Construct a revised balance sheet that includes lease obligations.
c. Compute total debt to total assets on the original and revised balance sheet.
d. Compute total debt to equity on the original and revised balance sheets.
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?
f. Comment on management's perception of market efficiency.