ch9sol - Solutions to Investment Valuation 34 CHAPTER 9...

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Solutions to Investment Valuation 34 CHAPTER 9 MEASURING EARNINGS Problem 1 Year Operating Lease Expense Present Value at 7% 1 90 84.11215 2 78.60949 3 85 69.38532 4 80 61.03162 5 57.03889 6-10 75 219.2538 Sum of present values 569.4313 The debt value of operating leases is $569.4313 million. Including this amount in debt, the book value debt to equity ratio becomes 569/1000 or 0.5694 Problem 2 If EBIT (with operating leases expensed) equals $200 million, and we wish to capitalize operating leases and compute adjusted operating income, we need to make an assumption regarding the depreciation on the asset created by the operating lease capitalization. A convenient assumption is that the interest expense equals the difference between the actual operating lease payment and the depreciation on the asset. Hence the total amount to be expensed in the computation of net income is the actual lease payment. However, in order to compute operating income alone, we need to add back the imputed interest payment, which would be 7% of the value of the capitalized operating leases as of one year ago.
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ch9sol - Solutions to Investment Valuation 34 CHAPTER 9...

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