The Canadian National Railway Company’s (CN) total assets in a recent year were $24,004 million and its total liabilities were $14,180 million. That year, CN reported operating lease commitments for its locomotives, freight cars, and equipment totaling $740 million. If these assets had been recorded as capital leases, assume that assets and liabilities would have risen by approximately $740 million.
(a) Calculate CN’s debt to total assets ratio, first using the figures reported, and then after increasing assets and liabilities for the unrecorded operating leases.
(b) Discuss the potential effect of these operating leases on your assessment of CN’s solvency.