Millennium Airlines Corp. (MAC) reported the following year-end data: Rent expense $23 million Depreciation expense $17 million EBIT $88 million Interest expense $22 million Total assets $500 million Long-term debt $150 million Capital lease obligations $100 million Total equity $250 million MAC also reported that the present value of its operating leases at the beginning of the year was $240 million. The term on the leases was 8 years. What are the effects on the leverage (liabilities / total capital) and times interest earned if an analyst chooses to capitalize the leases at a rate of 10% using a straight-line depreciation assumption? Leverage measures: A) increase to 65% from 50% and times interest earned decreases to 1.76 times from 4 times. B) increase to 65% from 50% and times interest earned decreases to 1.33 times from 4 times. C) remain unchanged and times interest earned decreases to 1.23 times from 4 times. I am getting hung up on the definition of “total capital.” I got the right answer (A) because I understand what’s going on with the interest calculation, but why do you include the PV of the lease payments in “total capital?” When I did the question I assumed total capital just meant equity. Is that a definitional thing I just missed?