It is common practice for retail outlets to lease their store locations and distribution centers. Walmart is no exception. Note 11 to Walmart's consolidated financial statements for the fiscal year ending January 31, 2016 (found online at the text website or available for download in the investor relations section of Walmart's website), provides information on future operating lease commitments.

REQUIRED

a. Effectively capitalize the operating lease obligations. You must first choose and justify an interest rate. Assume that all cash flows occur at the end of each year.

b. Recompute the long-term debt to long-term capital ratio (see Chapter 5) using your capi- talized operating leases. Comment on the result

The Company has long-term leases for stores and equipment. Rentals (including amounts applicable to taxes, insurance, maintenance, other operating expenses and contingent rentals) under operating leases and other short-term rental arrangements were $2.5 billion in fiscal 2016 and $2.8 billion in both fiscal 2015 and 2014. Aggregate minimum annual rentals at January 31, 2016, under non-cancelable leases are as follows: (Amounts in millions) Operating Capital Lease Fiscal Year Leases and Financial Obligations 2017 $ 2,057 $ 815 2018 1,989 758 2019 1,794 710 2020 1,697 655 2021 1,530 624 Thereafter 12,438 5,093 Total minimum rentals $21,505 $ 8,655 Less estimated executory costs 39 Net minimum lease payments 8,616 Noncash gain on future termination of financing obligation 1,070 Less imputed interest (3,319) Present value of minimum lease payments $ 6,367