Question

Capitalizing Operating Leases
McDonald's Corp. was the lessee at 14,139 restaurant locations through ground leases at December 31, 2011. The lease terms are generally for 20 years.

The company is also the lessee under noncancelable leases covering certain offices and vehicles. The company's footnotes also revealed that at year-end 2011, the minimum lease commitments under noncancelable operating leases were:

In millions	Restaurant	Other	Total
2012	$1,172.6	$74.4	$1,247.0
2013	1,104.8	62.8	1,167.6
2014	1,019.50	55.4	1,074.9
2015	921.9	43.1	965.0
2016	813.9	37.9	851.8
Thereafter	6,039.1	208.8	6,247.9
Total minimum payments	$11,071.8	$482.4	$11,554.2

The following represents a condensed balance sheet for McDonald's for 2011:

MCDONALD'S CORPORATION Consolidated Balance Sheet
($ millions)	2011
Assets
Current Assets	$4,403.3
Noncurrent Assets	28,586.9
Total assets	$32,990.2
Liabilities and Shareholders' equity
Current liabilities	$4,509.5
Long-term debt	10,133.8
Other noncurrent liabilities	2,956.7
Shareholders' equity	15,390.2
Total liabilities and Shareholders' equity	$32,990.2

Required

1. Calculate the present value of the company's operating leases assuming an interest rate of 4%.

Hint - Assume any "thereafter" amount is straight-lined over the remaining lease period using the 5th year (2016) lease payment, with the final year amount as a plug figure to reconcile to the total future minimum lease payments.

Round answer to one decimal place.

$Answer million

2. Restate the company's balance sheet assuming that all operating leases are capitalized.

Enter answers using one decimal place (as shown above in the original condensed balance sheet).

MCDONALD'S CORPORATION Consolidated Balance Sheet
($ millions)	2011
Assets
Current Assets	Answer
Noncurrent Assets	Answer
Total assets	Answer
Liabilities and Shareholders' equity
Current liabilities	Answer
Long-term debt	Answer
Other noncurrent liabilities	Answer
Shareholders' equity	Answer
Total liabilities and Shareholders' equity	Answer

3. Calculate the:

(a) Long-term debt to shareholders' equity ratio, both with and without capitalization of operating leases.

For your calculations, use the amounts as they appear in the above balance sheets. Answer in a percent rounded to one decimal place.

(a) With operating lease capitalization	Answer	%
(b) Without operating lease capitalization	Answer	%

(b) Total debt to total assets ratio, both with and without the capitalization of the operating leases.

For your calculations, use the amounts as they appear in the above balance sheets. Answer in a percent rounded to one decimal place.

(a) With operating lease capitalization	Answer	%
(b) Without operating lease capitalization	Answer	%

Answer 1

Part 1

present value of the company's operating leases = $9132.8

	Total	PV factors	Present value
2012	1247	0.9615	1199.0
2013	1167.60	0.9246	1079.6
2014	1074.90	0.8890	955.6
2015	965	0.8548	824.9
2016	851.80	0.8219	700.1
2017	851.80	0.7903	673.2
2018	851.80	0.7599	647.3
2019	851.80	0.7307	622.4
2020	851.80	0.7026	598.5
2021	851.80	0.6756	575.5
2022	851.80	0.6496	553.3
2023	851.80	0.6246	532.0
2024	285.30	0.6006	171.4
Total minimum payments	11554.20		$9132.8

Part 2

MCDONALD'S CORPORATION Consolidated Balance Sheet
($ millions)	2011
Assets
Current Assets	4403.3
Noncurrent Assets (28586.9+9132.8)	37719.7
Total assets	42123.0
Liabilities and Shareholders' equity
Current liabilities (4509.5+1199.0)	5708.5
Long-term debt (10133.8+(9132.8-1199.0)	18067.6
Other noncurrent liabilities	2956.7
Shareholders' equity	15390.2
Total liabilities and Shareholders' equity	42123.0

Part 3 A

With operating lease capitalization = (18067.6+2956.7)/15390.2 = 136.6%

Without operating lease capitalization = (10133.8+2956.7)/15390.2 = 85.1%

Part 3 B

With operating lease capitalization = (5708.5+18067.6+2956.7)/42123 = 63.5%

Without operating lease capitalization = (4509.5+10133.8+2956.7)/32990.2 = 53.3%