A retail company that leases the majority of its space has:
·total assets of $4,500 million,
·total long-term debt of $2,125 million, and
·average interest rate on debt of 12%.
Note 8 to the 2011 financial statements contains the following information about the company’s future beginning of year lease commitments:
Note 8: Operating leases
| Year | Millions |
| 2012 | $ 200 |
| 2013 | 200 |
| 2014 | 200 |
| 2015 | 200 |
| 2016 | 200 |
| Total | $1,000 |
After adjustment for the off-balance-sheet financing, the debt-to-total-assets ratio for the company is closest to:
A is correct. The present value of the operating leases should be added to both the total debt and the total assets.
The present value of an annuity due of $200 for 5 years at 12% = $807.5.
(N = 5; I = 12; PMT = 200; Mode = Begin)
Adjusted debt to total assets = (2,125 + 807.5) ÷ (4,500 + 807.5) = 55.3%.