In: Finance
FoodMarkets Inc. is a grocery chain. It reported a debt to capital ratio of 10%, and a return on capital of 25%, on a book value of capital invested of $1 billion. Assume that the firm has significant operating leases. If the operating lease expense in the current year is $100 million and the present value of lease commitments is $750 million, estimate the FoodMarket's debt to capital and return on capital.
Information provided in question | ||||||
Debt to Capital Ratio | 10% | |||||
Return On Capital Ratio | 25% | |||||
Capital | 1,00,00,00,000.00 | |||||
Assumptions:- | ||||||
It is assumed that aforesaid Ratio are given after lease expenses. | ||||||
Required | ||||||
Debt to Capital | ||||||
Return On Capital | ||||||
Formula of | ||||||
Debt to Capital Ratio | = | Debt/Capital X100 | ||||
Assume Debt is X | ||||||
10% | = | x/1000000000*100 | ||||
= | 10,00,00,000.00 | |||||
Formula of | ||||||
Return On Capital | = | Profit/Capital X 100 | ||||
Assume profit is Y | ||||||
25% | = | Y/Capital X 100 | ||||
= | 25,00,00,000.00 | |||||
Note:- | ||||||
Operating leases do not increase capital base as ownership does not transfer in such leases. |