Exercise 10-16 Suppose McDonald’s 2017 financial statements contain the followin

Question

Exercise 10-16

Suppose McDonald’s 2017 financial statements contain the following selected data (in millions).

15,830.0

Compute the following values.

times

Suppose the notes to McDonald’s financial statements show that subsequent to 2017 the company will have future minimum lease payments under operating leases of $18,064.0 million. If these assets had been purchased with debt, assets and liabilities would rise by approximately $8,646 million. Recompute the debt to assets ratio after adjusting for this. (Round answer to 0 decimal places, e.g. 62%.)

Current assets $3,395.0 Interest expense $450.0 Total assets 29,045.0 Income taxes 1,932.0 Current liabilities 2,989.0 Net income 4,502.0 Total liabilities

15,830.0

Explanation / Answer

Answer:-

a.Working Capital = Current Assets – Current Liabilities

= $3,395.0-$2,989.0

Working Capital = $406

b.Current Ratio = Current Assets / Current Liabilities

= $3,395.0/$2,989.0

Current Ratio =1.14:1

c.Debt to assets ratio = Debt/ Total Assets

= 15,830.0/ 29,045.0

Debt to assets ratio= 55%

d.Times interest earned =( Interest expense+ Income taxes+ Net income)/ Interest expense

=($450.0+$1,932.0+$4,502.0)/$450.0

Times interest earned = 15.30 times

B. Debt to assets ratio, adjusted for off balance sheet lease obligations

= $15,830.0+$8,646/$29,045.0+$8,646

= $24,476/$37,691

=65%

By including these off balance sheet lease obligations the debt to total assets ratio increases from 55% to 65%, suggesting that McDonald’s is not as solvent as it first appear

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