McDonald’s Corp. was the lessee at 14,139 restaurant
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:
| 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:
| Assets | |
| Current Assets | $4,403.0 |
| Noncurrent Assets | 28,586.9 |
| Total assets | $32,989.9 |
| Liabilities and Shareholders' equity | |
| Current liabilities | $3,509.2 |
| Long-term debt | 12,133.8 |
| Other noncurrent liabilities | 2,956.7 |
| Shareholders' equity | 14,390.2 |
| Total liabilities and Shareholders' equity | $32,989.9 |
Required
1. Calculate the present value of the company's operating leases assuming an interest rate of 6%.
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. Use Excel or a financial calculator for your computations. Do not round until your final answer. Round your answer to the nearest million dollars.
$Answer
million
2. Restate the company's balance sheet assuming that all operating leases are capitalized.
Use Excel or a financial calculator for your computations. Do not round until your final answer for each account balance. Round your answers to the nearest million dollars.
| 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. Hint: To calculate ratio, use long-term debt amount only (do not include current portion).
| (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 | % |
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Rating:
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Solution: McDonald’s Corp. was the lessee at 14,139 restaurant