I was revising when i came across this confusion. I am specifically referring to Page 157 in Schweser Book 2 : Reading 26 : FSA Fig 16: They’ve calculated Total Debt-to-Equity ratio through unadjusted Equity. Shouldn’t they adjust the equity for the adjusted income. Like ($50,190 + 2400 Rent - 1820 Depreciation - 910 interest expense.) That cover girl is annoying.
Equity will not be adjusted. remember - an asset and a liability of the same amount is created when a operating lease is brought on to the balance sheet. A goes up, L goes up, E remains unchanged, so that the A=L+E matches up after the change.
The point of having an operating lease is to avoid the increased leverage ratio. So bringing it back onto the balance sheet naturally needs to raise the leverage ratio, assets and liabilities.
Yes the same asset and liabilites are created but what about the *end of year* ratios. Kindly have a look at that page once. In revised ratios, the EBIT, depreciation and interest has changed. This means that NI should also change. Which changes the equity eventually. So why not adjust equity too?
you are forgetting the tax effect. NI might increase or decrease, in addition DTL/DTA might be reversed, and changes in Income tax would overall balance out… overall A and L change but E remains the same.