Impact of Capitalizing the Value of Operating Leases
Response to the following problem:
The following information comes from the financial statements of Karlla Peterson Company:
Total liabilities..........................$100,000
Total stockholders'equity...........80,000
In addition, Karlla Peterson has a large number of operating leases. The payments on these operating leases total $20,000 per year for the next 15 years. The present value of the economic obligation associated with these operating leases is $150,000. Of course, because these are operating leases, this economic obligation is off the balance sheet.
Compute the following ratio values:
1. Debt ratio.
2. Debt-to-equity ratio.
3. Debt-to-equity ratio assuming that Karlla Peterson's operating leases are accounted for as capital leases.
4. Debt ratio assuming that Karlla Peterson's operating leases are accounted for as capital leases.