the early retirement of the debt a good decision! Wha Johnson & Johnson disclose

ID: 2572589 • Letter: T

Question

the early retirement of the debt a good decision! Wha Johnson & Johnson disclosed in its annual report that it leases various vehicles and Operating Leases. machinery using operating lease agreements. According to its footnotes the minimum payments required unde the noncancelable operating lease agreements were as follows: TA 4 E9.24 Operating Leases $200 157 Year Ending ( millions) 2015 2016 2017 2018 2019 After 2019 . 80 Total . $691 If the interest rate implicit in each of the lease agreements is four percent, what is the present value company's noncancelable lease payments? Johnson & Johnson's long-term debt-to-equity ratio at was 269 percent ($18,760/$69,752). If the company's operating leases were accounted for as cap instead of operating leases, how would the firm's long-term debt-to-equity ratio change? the ear-en

Explanation / Answer

Year

Operating lease

PV factor @ 4%

Present Value

2015

200

0.962

192.40

2016

157

0.925

145.22

2017

111

0.889

98.68

2018

0.855

68.40

2019

0.822

54.25

TOTAL

558.95

Terminal value at the end of 2019 = 77/4% = 1925

Present value of terminal value = 1925*present value interest factor(4%,5) = 1925*0.8219 = 1582.16

Total present value noncancelable lease payment = 558.95 + 1582.16 = 2141.11

If company’s operating lease is accounted for as capital lease then total liability of company will be = 18760 + 2141.11 = 20901.11

Total shareholders’ equity = 69752

Long term debt to equity ratio = 20901.11/69752 = 30%