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	$ 65		Current liabilities	$ 20
Fixed assets		65	Long-term liabilities		35
			Total liabilities	$ 55
			Stockholders' equity		75
Total assets	$ 130		Total liabilities and stockholders' equity	$ 130

The footnotes stated that the company had $23 million in annual capital lease obligations for the next 10 years.

a.	Discount these annual lease obligations back to the present at a 12 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

$ million

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").)

Balance Sheet (In $ millions)
Current assets	$	Current liabilities	$
Fixed assets		Long-term liabilities
Leased property under capital lease		Obligations under capital lease
		Total liabilities	$
		Stockholders' equity
Total assets	$	Total liabilities and Stockholders' equity	$

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.)

Original	%
Revised	%

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.)

Original	%
Revised	%

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?

	Yes
	No

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