1. An analyst has decided to capitalize the operating leases of Company A. Using information in the notes to the company’s 2015 financial statements, she has determined that the present value of future minimum lease payments, at a discount rate of 10 percent, on December 31, 2015 equals €500 million. All lease contracts last another 5 years on December 31, 2015. As expected at the beginning of the year, the company reports an operating lease expense in its income statement for 2016 of €80 million. The company’s tax rate equals 30 percent. The company does not engage in any new operating leases in 2016. The following information is also available from Company A’s financial statements (all ratios use beginning-of-the-year balance sheet values)

Debt to capital (at beginning of 2016) = 0.55

Return on beginning equity in 2016 = 0.10

Assets / Capital (at beginning of 2016) = €3,400 million

The effect of capitalizing Company A’s operating leases on its leverage ratio (debt to capital) equals

A.   An increase from 0.55 to 0.61 (rounded).

B.   An increase from 0.55 to 0.74 (rounded).

C.   An increase from 0.55 to 0.82 (rounded).

D.   A decrease from 0.55 to 0.51 (rounded).

2. An analyst has decided to capitalize the operating leases of Company A. Using information in the notes to the company’s 2015 financial statements, she has determined that the present value of future minimum lease payments, at a discount rate of 10 percent, on December 31, 2015 equals €500 million. All lease contracts last another 5 years on December 31, 2015. As expected at the beginning of the year, the company reports an operating lease expense in its income statement for 2016 of €80 million. The company’s tax rate equals 30 percent. The company does not engage in any new operating leases in 2016. The following information is also available from Company A’s financial statements (all ratios use beginning-of-the-year balance sheet values)

Debt to capital (at beginning of 2016) = 0.55

Return on beginning equity in 2016 = 0.10

Assets / Capital (at beginning of 2016) = €3,400 million

The effect of capitalizing Company A’s operating leases on its return on beginning equity equals

A. An increase from 0.10 to 0.15 (rounded).

B. An increase from 0.10 to 0.13 (rounded).

C. A decrease from 0.10 to 0.07 (rounded).

D. A decrease from 0.10 to 0.05 (rounded).