As of January 31, 2009, Wal-Mart reported balance sheet total assets and total liabilities of $163 billion and $98 billion, respectively. In the footnotes the company disclosed future operating lease payments of $12.8 billion. Future capital lease payments of $5.5 billion were discounted to $3.5 billion were discounted to $3.5 billion and disclosed at that amount on the balance sheet.
Required:
(a) Describe the difference between a capital lease and a operating lease.
(b) Explain why a company might want to treat its leases as operating leases.
(c) Compute the effect on Wal-Mart’s total liability/total assets ratio if the company treats all its leases as capital leases. Assume that future operating lease payments are discounted at the same rate as future capital lease payments.
(d) Explain how this kind of analysis may be useful to an analyst trying to compute the financial position and performance of two companies that rely heavily on leasing.