Question

Analyzing and Capitalizing Operating Lease Payments Disclosed in Footnotes
YUM! Brands, Inc. discloses the following in Note 11 to its 2014 10-K report relating to its lease commitments:

(in millions)	Capital Leases	Operating Leases
2015	$20	$709
2016	21	661
2017	20	609
2018	20	555
2019	20	501
Thereafter	181	2,444
Total Minimum lease payments	$282	$5479

At December 27, 2014, the present value of minimum payments under capital leases was $175 million.

Operating leases are not reflected on-balance-sheet. In our analysis of a company, we often desire to capitalize these operating leases, that is, add the present value of these lease payments to both the reported assets and liabilities.

a. What is the implied interest rate in the capital leases?

Round answer to the nearest whole number (i.e., 8%) Answer

%

b. Compute the present value of Yum!'s operating lease payments assuming a discount rate equal to the rate computed in part a.

Use rounded rate from part a. Round answer to the nearest whole number.

$Answer

million

c. What effect does capitalization of Yum!'s operating leases have on its total liabilities (it reported total liabilities of $6,732 million for 2014)?

Use rounded answer from part b.

The capitalization Answerincreasesdecreases

Yum!'s total liabilites to a total of $Answer

million.

Answer 1

			Amount($)Million
(a)	Present Value factor for 5 years at 10% is 0.621(as per trail & error method)
	Interest rate	282*0621	175
	Therefore interest rate is 10%
(b)	Present Value of Yums Operating Lease
Year	Operating Lease	Pvfactor @10%	Pv of Operating Lease
1	709	0.909	644
2	661	0.826	546
3	609	0.751	457
4	555	0.683	379
5	501	0.621	311
6	2444	0.564	1378
			3716
©	Capitalisation of operating lease increases the liability
	Therefore Liability after Operating Lease capitalisation is (6732+3716) $10448 Million