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Question - BAV Energy has provided electricity and gas to thousands of households and companies. Recently, the new CEO of BAV Energy, who began in that position 3 months ago, announced that the company has a plan to borrow from banks. A credit analyst, examining the company's ?nancial statements of 2018, finds the following information for its operating leases:
Year
2019
2020
2021
2022
2023
Lease payments
11
12.1
13.31
14.64
16.11
The company also reported the following information in its 201 8 annual reports:
Total debt $1000
Total equity $2000
Earnings before interest and tax (EBIT) $500
Lease payment $10
Interest expense $100
Required -
1. Assume the company has a cost of debt of 10%. Estimate the present value of the leased assets.
2. Make accounting adjustments to accounting numbers in the financial statement to convert the operating lease into capital lease.
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