i) We read from balance sheet of XY invest in 2015, 1.5 billion USD in equity 100 million USD in debt

From Income statement the firm made 90 million in operating lease payment, and their promise to make lease payments for the next 5 years & above are

Year	Operating Lease Expense
1	95 million
2	90 million
3	85 million
4	85 million
5	80 million
sum	410 million

Current cost of borrowing is 7.5%. Earning before interest and tax rate (with operating lease expensed) was 250 million.

1. What is debt value of the operating leases and calculate the adjusted D/E-ratio.

2. Assuming that operating leases have been capitalized, the adjusted operating income can be calculated either by assuming straight line depreciation or by assuming depreciation = principal payments. Calculate the adjusted operating income using both methods.

3. What are the effects on net income from capitalizing operating leases?

ii) XY Inc. net income of 200 million USD on a start book value of equity of 1.6 billion USD in 2015. Paid 75 million USD in dividends & bought back 20

million USD of stock during the year.

a) Assuming that the firms return on equity & reinvestment rate remain the same in 2015, estimate the expected growth rate in 2016.

b) The average return on equity for the industry is 15%. If XY Incs return on equity changes to match the industry average in 2016, estimate the expected growth rate in earnings in 2016.

c) If the reinvestment rate remained at the 2015 level, by how many percentage points did the return on equity have to change in order for the 2016 growth rate to be 10%?