Reformulation for Multi-Year Capitalization of Operating Leases Use the informat

Question

Reformulation for Multi-Year Capitalization of Operating Leases

Use the information provided below for Southwest Airlines to answer the requirements.

Below are the adjustments that analysts would use to account for Southwest's operating leases as if they were capitalized. Adjustments are based on the present value of Southwest's operating leases for fiscal years 2013-2015.

a. Compute the following ratios using the unadjusted and the adjusted numbers for each year. For simplicity only, use year-end balances for NOA, NNO, and equity.

Round ROE, RNOA, and NOPM to one decimal place (ex: 0.2345 = 23.5%).

Round NOAT and FLEV to two decimal places.

Use negative signs with answers, when appropriate.

b. Does the lease capitalization make a large difference in any of these ratios?

Lease capitalization makes a large difference in both the RNOA and FLEV ratios.

Lease capitalization makes a large difference in both the ROE and RNOA ratios.

Lease capitalization makes a large difference in both the RNOA and NOPM ratios.

Lease capitalization makes a large difference in both the ROE and FLEV ratios.

$ millions 2013 2014 2015 Net operating assets (NOA) $ 7,337 $ 6,812 $ 7,818 Net nonoperating obligations (NNO) (332) (296) 127 Total stockholders' equity 7,669 7,108 7,691 Net nonoperating expenses (NNE) 119 118 106 Net operating profit after tax (NOPAT) 873 1,254 2,287 Net income 754 1,136 2,181 Revenue 18,810 19,716 20,931

Explanation / Answer

2013 2014 2015 unadjusted adjusted unadjusted adjusted unadjusted adjusted ROE 9.8 9.8 16 16 28.4 28.4 ROE= NET INCOME/AVERAGE STOCK HOLDERS EQUITY RNOA 11.9 9 18.4 12.3 29.3 21.5 RNOA= NET OPERATING PROFIT AFTER TAX/AVG NET OPERATING ASSETS NOPM 4.6 5.1 6.4 6.9 10.9 11.3 NOPM = NET OPERATING PROFIT AFTER TAX/REVENUES NOAT 256.37 177.39 289.43 178.33 267.73 190.18 NOAT= REVENUES / AVERAGE NOA FLEV -4.33 38.27 -4.16 55.54 1.65 43.1 flev= avg nno/avg stock holders equity adjusted figures 2013 2014 2015 b)Lease capitalisation makes a large difference in RNOA and FLEV ratios noa 10604 11056 11006 nopat 954 1359 2366 nno 2935 3948 3315 EXCEl formulas 2013 2014 2015 unadjusted adjusted unadjusted adjusted unadjusted adjusted ROE =ROUND(754/7669*100,1) =ROUND(754/7669*100,1) =ROUND(1136/7108*100,1) =ROUND(1136/7108*100,1) =ROUND(2181/7691*100,1) =ROUND(2181/7691*100,1) ROE= NET INCOME/AVERAGE STOCK HOLDERS EQUITY RNOA =ROUND(873/7337*100,1) =ROUND((873+81)/10604*100,1) =ROUND(1254/6812*100,1) =ROUND((1254+105)/11056*100,1) =ROUND(2287/7818*100,1) =ROUND((2287+79)/11006*100,1) RNOA= NET OPERATING PROFIT AFTER TAX/AVG NET OPERATING ASSETS NOPM =ROUND(873/18810*100,1) =ROUND(954/18810*100,1) =ROUND(1254/19716*100,1) =ROUND(1359/19716*100,1) =ROUND(2287/20931*100,1) =ROUND(2366/20931*100,1) NOPM = NET OPERATING PROFIT AFTER TAX/REVENUES NOAT =ROUND(18810/7337*100,2) =ROUND(18810/10604*100,2) =ROUND(19716/6812*100,2) =ROUND(19716/11056*100,2) =ROUND(20931/7818*100,2) =ROUND(20931/11006*100,2) NOAT= REVENUES / AVERAGE NOA FLEV =ROUND(-332/7669*100,2) =ROUND(2935/7669*100,2) =ROUND(-296/7108*100,2) =ROUND(3948/7108*100,2) =ROUND(127/7691*100,2) =ROUND(3315/7691*100,2) flev= avg nno/avg stock holders equity adjusted figures 2013 2014 2015 b)Lease capitalisation makes a large difference in RNOA and FLEV ratios noa =7337+3267 =6812+4244 =7818+3188 nopat =873+81 =1254+105 =2287+79 nno =-332+3267 =-296+4244 =127+3188

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