Exam 20: Leases and Retirement Obligations

Which of the following company types is most likely to have operating leases as an off-balance-sheet liability?

Investors,lenders,and rating agencies tend to interpret operating leases the same as traditional debt.

Use the following information to answer the next question: Operating assets = $3,000 Operating liabilities = $1,000 Book value of debt = Market value of debt = $1,500 Book value of equity = $500 Market value of equity = $900 Value of operating leases = $2,000 After-tax required return on unsecured debt = 6% Required return on equity (CAPM )= 13% After-tax required return on secured debt = 5% -What are (1 )the WACC before adjustment for leases and (2 )the WACC after adjustment for leases?

In making adjustments for leases,an analyst will have to get the information on rental expenses from the company's footnotes and estimate the value of the asset.

Excess pension assets should be treated as operating assets,and unfunded pension liabilities should be treated as a debt equivalent.With respect to taxes,valuations should be done on a pretax basis.

Using the formula that incorporates the rental expense,asset life,and an appropriate interest rate,compute the estimated value of a leased asset at the beginning of an accounting period.The rental expense for the ensuing period is $2,500,the relevant cost of debt is 6.2 percent,and the asset's life is 10 years.

A profitable company has chosen to lease its assets.With respect to ROIC,capital productivity,and operating profits,which of those measures are likely to artificially rise?

Classification of amortization of prior service cost and curtailment (or settlement )loss (or gain )will depend on the purpose of analysis.

Which of the following adjustments for securitized receivables on the balance sheet are appropriate for determining return on capital,free cash flow,and leverage consistently? I.Increase short-term debt. II.Decrease long-term debt. III.Add back securitized receivables to the balance sheet. IV.Treat the fees paid for securitizing receivables as interest.

Given the following information,what are the (unadjusted )operating profits and operating profits adjusted for pension liabilities and assets? (The amortized prior-year service cost and the amortization of losses are both zero. ) Operating revenues = $1,000 Operating costs = $600 Pension interest cost = $700 Expected return on pension plan assets = $500 Pension service cost = $150

If there is no line item for prepaid pension assets or unfunded pension liabilities on a firm's balance sheet,this means the firm's pension plan is fully funded.

The interest rate for operating lease adjustments is usually higher than the firm's cost of debt.

When computing cash flows for a company with operating leases,an analyst should add back the lease depreciation to NOPLAT.

With respect to operating leases,adjusting the financial statements makes ROIC and free cash flow independent of capital structure choices,specifically whether to lease,own,or borrow.

Since valuation is not affected by the treatment of operating leases,capitalizing operating leases is not a useful activity for analysts.

The most common forms of off-balance-sheet debt are operating leases,securitized receivables,and unfunded retirement obligations.

Since interest costs,expected returns on plan assets,and amortization of losses are part of the compensation expenses for a firm,they should be considered to be a part of NOPLAT.

Researchers at Ohio State University found that interest rates on unrated,unsecured debt were explained better by credit statistics adjusted for operating leases.

Apex Industries expects to earn $25 million in operating profit next year.The company pays an operating tax rate of 30 percent.If the value of leased asset is $125 and the cost of debt is 10 percent,what is the approximate after-tax operating profit,adjusted for capitalized operating leases?

Use the following information to answer the next question: Operating assets = $3,000 Operating liabilities = $1,000 Book value of debt = Market value of debt = $1,500 Book value of equity = $500 Market value of equity = $900 Value of operating leases = $2,000 After-tax required return on unsecured debt = 6% Required return on equity (CAPM )= 13% After-tax required return on secured debt = 5% -What are (1 )invested capital before adjustment for leases and (2 )invested capital after adjustment for leases?