The Ellis Corporation has heavy lease commitments. A new vice-president wants the lease obligations footnoted in the balance sheet as follows:

The footnotes would state that the company had $10 million in annual capital lease obligations over the next 20 years.
a. Discount these annual lease obligations back to the present at a 6 percent discount rate (round to the nearest million dollars).
b. Construct a revised balance sheet that includes lease obligations, as in Table 16--6.

Table 16-6

c. Compute 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 efficient capital market environment, should the consequences of the CICA recommendation, 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).

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ELLIS CORPORATION ($ millions) Current liabilities... Current assets Capital assets. $ 50 $ 10 Long-term liabilities... 30 50 Total liabilities.... 40 Shareholders' equity. Total liabilities and equity. ....... 60 Total assets. . . . $100 $100 (1) (2) (3) (4) Interest Tax Shield Aftertax Cost of (1) + (3) ($1,119) (1,152) (1,188) (1,227) (5) Loan Present Value at 6% ($1,056) (1,025) (997) (972) (2) x 0.4 $200 Year Payment ($1,319) (1,319) (1,319) (1,319) (1,319) Interest $500* 2 418 167 328 131 4 229 92 48 _(950) (5,000) 120 (1,271)