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If you capitalize operating leases and treat them as debt, which of the following will always occur? Group of answer choices A) The debt ratio will increase B) The return on capital will go up C) The cost of equity will increase because of the higher debt ratio D) The operating income will increase because you will be adding back operating lease expenses E) None of the above
If you capitalize operating leases and treat them as debt, which of the following will always occur?
Group of answer choices
A) The debt ratio will increase
B) The return on capital will go up
C) The cost of equity will increase because of the higher debt ratio
D) The operating income will increase because you will be adding back operating lease expenses
E) None of the above
Expert Solution
A). The debt ratio will increase
The formula for debt ratio is given as follows:
Debt ratio = Total debts / Total assets
When the capital lease transaction treated as a debt, It will increases the total liabilities or debts. The total debts is the numerator in the debt ratio. When total debts increases, the debt ratio will also increases.
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