FoodMarkets Inc. is a grocery chain. It reported a debt to capital ratio of 10%, and...

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.

Expert Solution

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.

jeff jeffy answered 8 months ago

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