CFAI Mock 2012 Morning Session Q41

In this question, I know the data was given in the question for the adjustment etc but where in the question it is stated that I am supposed to use the adjusted D/E ratio from the vignette. What I did in this question was, started calculating lease adjustment as I had done in the previous question for 2010. But the problem is that the information given in the vignette do not result in the same answer as you would get by calculating PV for the lease to adjust for operating lease. How do you decide whether to use the information in the vignette or calculate PV from the lease payments to calculate the adjustments. I mean where is the difference coming from? In fact the adjustment for 2009 is lesser than for 2010, which should have ideally been higher due to the payment in 2010. Can anyone of you please point out flaw in my approach?

You’re not given the operating lease commitments as of Dec 31, 2009 so you can’t work out the PV of the operating leases (eg there might have been some in 2010 that you don’t know about).

So you have to go with the info given about the D/E ratio.

No but this is given in the statements clearly. Why can’t I pick from there? The problem is that they have listed clearly as “Operating lease payments”. If they had something else in the statements, I would have assumed I should have gone with the information in the vignette. The only thing I am going to assume in this case is whether to add that in the BGN mode or END mode otherwise I know what payments are. lol, perhaps discount rate as well in the end mode. Nonetheless, The point is that the adjustment that they have given in the question are not even close the what you get by doing this in all possibilities. I mean how can adjustment be lower than the previous year?

wait, i thought you take the adjusted D/E (given) and work back to get what the adj D is. with that, you can find adj EBIT and adj I for the ICR.

not too sure why you’re asking though.

I was actually taking much complex route of calculating the debt from lease payment but I am not getting the same answer.

The only thing I can see is that the Operating Lease Commitments are as of the end of 2010 so i guess somewhere in there things changed. I see what you are saying - I think I get 843 your way but they are claiming its 606. I guess maybe in 2010 they added operating leases so in 2009 they only had 606 but then they added some and then in 2010 they were 760