Will capital lease decrease or increase the interest rate coverage ratio compare to operational lease? I thought it should be ambiguous, because capital lease will decrease EBIT as well as interest expense. so the EBIT/I should be ambiguous? however, the correct answer is decrease. anyone knows why?
with capital leases EBIT is higher and so is the interest rate. I was looking at that same question and I figured that the denominator effect dominates. Anyone else want to chime in?
Both EBIT and I are higher with capital lease. You can safely assume EBIT>I so the effect on I is greater, so coverage ratio decreases.
why can I assume that?
and a denominator is lower (operating lease - no interest expense) hence capital lease is greater
libra_june, opearting lease - high interest expense.
singles, for starters EBIT is the income before interest and a bunch of other claims are stripped out, and it’s safe to assume that it’s larger than int exp.
singlesong80 Wrote: ------------------------------------------------------- > libra_june, opearting lease - high interest > expense. no, there’s no debt you’re servicing. Int expense is higher under capital, because the lease is recorded as liability on the balance sheet.
humm…i have got some reading to do. thanks
you were right before you edited your post.
so the payment under operating lease is considered as rent expense, not interest expense? am i right?
In Capital Lease, EBIT should be higher by the difference between Rent and Depreciation. Is that difference the same amount as the increase in interest?