Question

Reformulation for Multi-Year Capitalization of Operating Leases

Use the information provided below for Southwest Airlines to answer the requirements.

$ millions	2013	2014	2015
Net operating assets (NOA)	$ 7,670	$ 7,145	$ 8,151
Net nonoperating obligations (NNO)	(332)	(296)	127
Total stockholders' equity	8,002	7,441	8,024
Net nonoperating expenses (NNE)	152	151	139
Net operating profit after tax (NOPAT)	906	1,287	2,320
Net income	754	1,136	2,181
Revenue	20,365	21,271	22,486

Below are the adjustments that analysts would use to account for Southwest's operating leases as if they were capitalized. Adjustments are based on the present value of Southwest's operating leases for fiscal years 2013-2015.

Balance Sheet Adjustments ($ millions)	2013	2014	2015
Net operating assets (NOA)	+3,267	+4,244	+3,188
Net nonoperating obligations (NNO)	+3,267	+4,244	+3,188
Equity	0	0	0

Income Statement Adjustments ($ millions)	2013	2014	2015
Interest expense	+129	+167	+126
Net nonoperating expense, NNE	+81	+105	+79
Net operating profit after tax, NOPAT	+81	+105	+79
Net income	0	0	0

a. Compute the following ratios using the unadjusted and the adjusted numbers for each year. For simplicity only, use year-end balances for NOA, NNO, and equity.

• Round ROE, RNOA, and NOPM to one decimal place (ex: 0.2345 = 23.5%).

• Round NOAT and FLEV to two decimal places.
• Use negative signs with answers, when appropriate.

	2013		2014		2015
	Unadjusted	Adjusted	Unadjusted	Adjusted	Unadjusted	Adjusted
ROE
RNOA
NOPM
NOAT
FLEV

b. Does the lease capitalization make a large difference in any of these ratios?

Lease capitalization makes a large difference in both the RNOA and FLEV ratios.

Lease capitalization makes a large difference in both the ROE and RNOA ratios.

Lease capitalization makes a large difference in both the RNOA and NOPM ratios.

Lease capitalization makes a large difference in both the ROE and FLEV ratios.

Answer 1