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
610
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.
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
This is the end of the preview.
Sign up
to
access the rest of the document.
 Three '11
 XX
 Depreciation, Debt, Valuation, 10%, 1 year, $30, 4 Year, operating leases

Click to edit the document details