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:

In \( millions	In \) millions
Current assets	\(70	Current liabilities	\)30
Fixed assets	\(70	Long-term liabilities	\)30
		Total liabilities	\(60
		Stockholder’s equity	\)80
Total assets	\(140	Total stockholder’s equity and liabilities	\)140

The footnotes stated that the company had $14 million in annual capital lease obligations for the next 20 years.

f. Comment on management’s perception of market efficiency (the viewpoint of the financial officer).

Short answer

The management perceives that the markets are not as efficient as perceived by the academics.

Step-by-step solution

Meaning of market efficiency

Market efficiency refers to the capability of the market to reflect the prices after considering all the information available to the public. The prices of an efficient market are fair and reflect all relevant information.

Management’s perception of market efficiency

The management perceives that the market is not as efficient as believed by the academics. The management believes that the information available to the public takes time to the reflected in its prices and is not simultaneously reflected in the market.