The question asked what ratio would be higher b/c of a capitalization of leases. The answer is higher debt/equity which I agree with. But they also had I believe ROE and Profit Margin as answer choices. Wouldn’t your NI increase with the capitalization of leases and increase these ratios as well?
thepinkman Wrote: ------------------------------------------------------- > The question asked what ratio would be higher b/c > of a capitalization of leases. The answer is > higher debt/equity which I agree with. But they > also had I believe ROE and Profit Margin as answer > choices. Wouldn’t your NI increase with the > capitalization of leases and increase these ratios > as well? yeah but equity increases too, PVLO goes into the LTD, Non CA assets increase as well
PP&E increases
.
Well how about NI/Sales?
Remember that it’s “most likely.” NI may increase/stay the same/decrease, but only by a marginal amount, whereas debt will increase dramatically, guaranteed.
stupid play of words
ChicagoPMA Wrote: ------------------------------------------------------- > Remember that it’s “most likely.” NI may > increase/stay the same/decrease, but only by a > marginal amount, whereas debt will increase > dramatically, guaranteed. But if its a matter of capitalizing vs expensing net income will certainly increase by capitalizing. If it doesn’t then I suppose I don’t know anything.
I know this wording is crappy, but the decrease in expenses will be marginal, and so NI will increase only marginally. The increase in liabilities will be material. Assuredly, debt-to-income will be materially different. It’s the best choice available.
thepinkman Wrote: ------------------------------------------------------- > ChicagoPMA Wrote: > -------------------------------------------------- > ----- > > Remember that it’s “most likely.” NI may > > increase/stay the same/decrease, but only by a > > marginal amount, whereas debt will increase > > dramatically, guaranteed. > > But if its a matter of capitalizing vs expensing > net income will certainly increase by > capitalizing. If it doesn’t then I suppose I > don’t know anything. pink: say a 10 year op lease being capitalized: on the IS, SG&A down from removal of lease payment COGS increased by addition of current year’s portion of depreciation interest expense increased by current portion NI is changed by the current year’s portion only, how much will depend on the method of depreciation (SL vs DDB etc) on BS LTD AND PP&E are upped by remaining 9 years of PVLO thus equity rises more by virtue of the remaining years in the lease that you have to account for
Oh I get it. Leases are unlike other capitalized assets.
thepinkman Wrote: ------------------------------------------------------- > Oh I get it. Leases are unlike other capitalized > assets. Pretty much the reverse, this is the one you want to move onto the BS and out of expenses. Capitalized Interest and Intangibles: out of the BS and into expenses
“Net” income in early years would actually decrease b/c combined depreciation and interest expense would be higher under capitalization lease than operating lease. Beware though, “operating” income would be higher under capital lease since interest in deducted further down the I/S.
If you capitalize a lease, Net Income will be LESS early in the term of the lease, and it will be MORE later in the lease. This is because principle is not deducted from net income. Like any ammortizing asset, a lease has higher interest expense early on and lower interest expense later in the lease. So: Early in the lease: Interest + Depreciation is GREATER than the operating lease expense (small portion goes to principle repayment) Later in the lease: Interest + Depreciation is LESS than the operating lease expense (large portion goes to principle repayment We have to assume that the question is asking for the immediate effect because they aren’t asking what will happen 5 years from now. Make sense?
This is from back in the days in Level I, thought you could erase the details, but it keeps haunting you. Bet operating/capital lease will somehow even be in Level III haha