Leases Consider footnote 7 from the 2003 annual report of FedEx: Footnote 7: We utilize certain aircraft, land, facilities, and equipment under capital and operat- ing leases that expire at various dates through 2039.... A summary of future mini- mum lease payments under capital leases and noncancellable operating leases (principally aircraft and facilities) with an initial or remaining term in excess of one year at May 31, 2003 is as follows (in millions): Capital Leases Operating Leases 2004 $ 44 $ 1,368 2005 125 1,285 2006 102 1,192 2007 11 1,155 2008 11 1,045 Thereafter 238 8,342 Total $531 $14,387 1. Compute the net present value of the operating lease payments as of May 31, 2003. Use a 10% implicit interest rate. For ease of computation, assume each payment is made on May 31 of the designated year (i.e., the first $1,368 million payment is made on May 31, 2004) and that the final payment, labeled "Thereafter," is made on May 31, 2009. 2. Suppose FedEx were to capitalize the operating leases examined in requirement 1. Show the journal entries necessary to:

a. Capitalize the leases on June 1, 2003. Ignore any prior period adjustments, and do not break the lease obligation into current and long-term portions.

b. Record the first payment on May 31, 2004. 3. FedEx's total liabilities on May 31, 2003, were $8,097 million, and its total stockholders' equity was $7,266 million. Compute its total debt-to-equity ratio. Then, suppose FedEx capitalized its operating leases using the present value calculated in requirement 1. Recompute the debt-to-equity ratio. What difference does capitalizing the operating leases make to the debt-to-equity ratio? Explain.