Posted: March 17th, 2022
It is common practice for retail outlets to lease their store locations and distribution centers. Walmart is no exception. Note 11 to Walmart’s consolidated financial statements for the fiscal year ending January 31, 2016 (found online at the text website or available for download in the investor relations section of Walmart’s website), provides information on future operating lease commitments
1. Effectively capitalize the operating lease obligations. You must first choose and justify an interest rate. Assume that all cash flows occur at the end of each year and assume 10 periods for the ‘Thereafter’ period. You will need to indicate the Present value factor and the present value for each of the period(s) examined. One suggestion for the interest rate would be to divide the interest expense for the fiscal year ending January 31, 2016, by the average of the January 31, 2016, and January 31, 2015, interest-bearing debt. [Total 50 points: 40 points for capitalization and 10 points for justification of interest rates].
2. Re-compute the long-term debt to long-term capital ratio using your capitalized operating leases. [30 points: 10 points for calculation of long-term debt to long-term capital without the capitalized operating lease and 20 points for calculation of long-term debt to long-term capital with the capitalized operating lease]
3. Based on your results in (B) discuss what insights you have obtained regarding the financial position and risk of Walmart [20 points]
Reference: Wahlen, J. M., Baginski, S. P. & Bradshaw, M. T. (2018). Financial reporting, financial statement analysis and valuation, (9th ed). Cengage Learning Inc.
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