from Schweser Book 2, Test 3, #37: I don’t understand the part of the explanation which involves adding $4mil “implied interest expense on operating lease” I understand that NOPAT is EBIT(1-T), so it is going to be before interest expenses. But it seems to me that the transformation that needs to be applied to the income statement is that the rent expense needs to be removed, and replaced with depreciation & interest expenses. Depreciation is factored into NOPAT, and interest isn’t. So I’d like to back out rent expense and add in additional depreciation expense in order to treat the operating leases as capital. But I don’t see how that’s equivalent to adding the +4 implied interest expense to NOPAT. I didn’t think it was the case that rent = interest + depreciation, since depreciation is different every year.
I was doing this vignette and I highly doubt they are going to let us calculate NOPAT this way on the exam.
this vignette totally destroyed me.
Yea that’s exactly what happened to me, that exam started off easy and then went bonkers, i actually stopped doing it when I went wtf to this vignette cuz i had no idea how to calculate half the answers.
was this an errata?
They are saying ot treat the leases as capitalized, not operating, so the depreciation part of the lease will be lower than the “rent expense” (the remainder goes into interest. Since interest is of no use in NOPAT, the overall adjustment is to add 4M back to NOPAT. You are taking a portion of the costs OUT of SG&A and putting it into interest, so operating income goes UP. This vignette killed me…the residual income ? was killer and I just got lucky. I didn’t adjust book value or anything…