Compared to operating leases, a capital lease will have higher interest expense, but what happens to EBIT? Does it go up or down, or neither, and why?
EBIT should be lower because it is being reduced by the interest expense, or am I mistaken?
EBIT is lower for operating lease because it includes a large rent expense whereas capital lease only adjusts for depreciation (interest expense is non-operating)
Interest paid is considered an outflow to CFO. Wouldn’t that be included in interest expense?
interest expense is a nonoperating expense on the income statement
(unless you are in the business of lending and borrowing money)
Ok
supersharpshooter Wrote: ------------------------------------------------------- > interest expense is a nonoperating expense on the > income statement it is?
EBIT is higher for capital leases and so is interest expense. As a result, the interest coverage ratio decreases because generally the interest coverage ratio is greater than one.
Exactlty…EBIT is higher because under an operating lease, the expense flows through into SGA (an operating expense), whereas for a capital lease, the only expense that hits EBIT is the depreciation charge. However, net income will be lower (in the early years) for a capital lease, because the interest expense and depreciation expense on it will be greater than the expense of an operating lease.