A common practice of fast-food and retail coffee shop chains such as Starbucks is to lease some or all of their retail space. Starbucks' Form 10-K filing states that the firm "leases retail store, roasting and distribution facilities and office space under operating leases." Note 12 to Starbuck's Consolidated Financial Statements for the fiscal year ending September 28, 2008, provides the following future operating lease commitments of Starbucks as of the end of the fiscal year (amounts in millions).

Fiscal Year Ending in:

2009 ................ $ 741.0

2010 ................ 706.6

2011 ................ 660.7

2012 ................ 604.6

2013 ................ 546.4

Thereafter .............. 1,838.8

Total Lease Payments ........... $5,098.1

Required

a. Compute the present value of operating lease obligations using a 6 percent discount rate for Starbucks at September 28, 2008. Assume that all cash flows occur at the end of each year. Also assume that the minimum lease payments after 2013 occur evenly over a four-year period.

b. Refer to Exhibit 1.26 (Chapter 1), which reports the fiscal 2008 comparative balance sheet for Starbucks. Compute each of the following ratios for Starbucks as of September 28, 2008, using the amounts as originally reported in its balance sheets for the year.

(1) Liabilities to Assets Ratio = Total Liabilities/Total Assets

(2) Long-Term Debt to Long-Term Capital Ratio = Long-Term Debt/(Long-Term Debt + Shareholders' Equity)

c. Repeat Part b but assume that Starbucks capitalizes operating leases and reports them as part of long-term debt.

d. Comment on the results from Parts b and c. To what extent does the capitalization of operating lease obligations affect your assessment of Starbucks' risk?

e. Refer to Exhibit 1.27 (Chapter 1), which reports the comparative income statement for Starbucks for Year 4. Note that the firm reports an expense labeled "Cost of Sales including Occupancy Costs." Speculate why Starbucks reports cost of sales and occupancy (operating lease payments) costs as a combined amount on the income statement.