7.18 Effect of Capitalizing Operating Leases lance Sheet Ratios. Some retailing companies own their own stores or acquire their mises under capital leases. Other retailing companies acquire the use of store facilities under operating leases, contracting to make future payments. An analyst comparing the capital structure risks of retailing companies may want to adjust reported financial statement data to put all forms on a comparable basis. Certain data The airline's management requests you tion. How would you respond? from the financial statements of Gap Inc. and Limited Brands follow (amounts in millions). Balance Sheet as of January 31, 2009 Gap Inc. Current liabilities $2,158 Long-term debt Other noncurrent liabilities 1,019 Shareholders' equity 4,387 Total $7,564 Limited Brands $1,255 2,897 946 1,874 $6,972 $ 478 455 Minimum Payments under Operating Leases 2009 2010 2011 2012 2013 After 2013 Total 416 $1,069 927 712 520 386 1,080 $4,694 373 341 1,334 $3,397 REQUIRED a. Compute the present value of operating lease obligations using an 8% discount rate for Gap Inc. and Limited Brands as of January 31, 2009. Assume that all cash flows occur at the end of each year. Also assume that the minimum lease payment each year after 2013 equals $360 million per year for three years for Gap Inc. and $333.5 million for four years for Limited Brands. (This payment scheduling assumption can be obtained by assuming that the payment amount for 2013 continues until the aggregate payments after 2013 have been made, rounding the number of years upward, and then assuming level pay ments for that number of years. For Gap Inc: $1,080/$386 three years creates a three-year annuity of $1,080/3 years = $360 million per year.) 2.8 years. Rounding up to b. Compute each of the following ratios for Gap Inc. and Limited Brands as of January 31, 2009, using the amounts originally reported in their balance sheets for the year. (1) Liabilities to Assets Ratio Total Liabilities/Total Assets (2) Long-Term Debt to Long-Term Capital Ratio = Long-Term Debt/(Long-Term Debt + Shareholders' Equity) c. Repeat Requirement b but assume that these firms capitalize operating leases. d. Comment on the results from Requirements b and c