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MGMT E-2600 Homework #10 Due: December 1, 2015 by 11:59pm EST ! ! Topic: Present Value of Operating Lease Payments (Numerical calculations required) LO: 1 3. Kane Industries disclosed the following minimum rental commitments under non-cancelable operating leases in its 2014 annual report: ! Minimum operating lease payments Amount (in millions) 2015 2016 48 2017 35 2018 27 2019 22 Thereafter ! ! ! ! ! ! ! $ 74 19 Total $225 What is the present value of these operating lease payments, assuming a 6% discount rate? Topic: Effects of Not Capitalizing Operating Leases 2. Failure to appropriately capitalize leased assets and liabilities results in a number of distortions in the ROE disaggregation analysis. Which of the following is not a distortion? A) Net operating asset turnover is overstated due to the non-reporting of lease assets. B) Reported total expense is lower in the early years of a capital lease relative to an operating lease, but is higher in later years. C) Financial leverage is understated. D) Total assets are understated. E) All of the above are distortions. ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! Topic: Pension Expense 3. What are the three basic components of pension expense? ! ! Topic: Pension Expense Computation (Numerical calculations required) 4. Sharp, Inc., reported the following items in the 2014 pension footnote (in millions). ! Service cost $ 976 Benefits paid to retirees 155 Interest cost 775 Actual returns on pension plan assets Expected returns on pension plan assets ! 1,003 1,132 Amortization of deferred amounts 42 The company's pension expense for the year is: ! ! ! ! ! ! ! Topic: Understanding Pension Footnotes 5. Abbott Laboratories' has a defined benefit retirement plan. The company's 2013 annual report includes the following excerpt about these plans (in millions): ! Projected benefit obligations, January 1, 2013 Service cost benefits earned during the year 303 Interest cost on projected benefit obligations 276 Actuarial losses (gains) (650) Benefits paid (185) Separation of AbbVie Inc. (4,654) Other, including foreign currency translation 20 Projected benefit obligations, December 31, 2013 $6,432 Plans' assets at fair value, January 1, 2013 $7,949 Actual return on plan assets 727 Company contributions 724 Benefits paid (185) Separation of AbbVie Inc. (3,107) Other, primarily foreign currency translation ! $11,322 15 Plan assets at fair value, December 31, 2013 $6,123 What is the funded status of this plan? ! ! ! ! ! ! ! ! Topic: Advantages of Special Purpose Entities (SPE's) 6. Which of the following is an advantage often seen by a company using an SPE? And WHY? ! A) B) C) D) E) ! Increased liquidity Lower interest rates Avoiding consolidation Both A and B None of the above