Question

Suppose McDonald’s 2017 financial statements contain the following selected data (in millions).

Current assets		$3,385.0		Interest expense		$466.0
Total assets		29,035.0		Income taxes		1,883.0
Current liabilities		2,940.0		Net income		4,459.0
Total liabilities		15,534.0

1.		Working capital.		$445	millions
2.		Current ratio. (Round to 2 decimal places, e.g. 6.25:1.)		1.15
3.		Debt to assets ratio. (Round to 0 decimal places, e.g. 62%.)		54	%
4.		Times interest earned. (Round to 2 decimal places, e.g. 6.25.)		14.61	times

Suppose the notes to McDonald’s financial statements show that subsequent to 2017 the company will have future minimum lease payments under operating leases of $17,665.0 million. If these assets had been purchased with debt, assets and liabilities would rise by approximately $9,185 million. Recompute the debt to assets ratio after adjusting for this. (Round answer to 0 decimal places, e.g. 62%.)

Debt to assets ratio

Type your answer here

Answer 1

Part a) 1) Working Capital = Current Assets - Current Liabilities

= $3,385 millions - $2,940 millions = $445 millions

2) Current ratio = Current Assets/Current Liabilities

= $3,385 millions/$2,940 millions = 1.15 : 1

3) Debt to assets ratio = Total liabilities/Total assets

= $15,534 millions/$29,035 millions = 0.5350 or 54%

4) Times interest earned = Income before interest and Income taxes/Interest Expense

Income before interest and Income taxes = Net Income+Interest expense+Income taxes

= $4,459 millions+$466 millions+$1,883 millions = $6,808 millions

Times interest earned = $6,808 millions/$466 millions = 14.61 times

Part b)

Debt to assets ratio after adjusting off balance sheet items is calculated as follows:-

Debt to assets ratio = Total Liabilities/Total Assets

= ($15,534+$9,185) millions/($29,035+$9,185) millions

= $24,719 millions/$38,220 millions = 0.6468 or 65%

Therefore the debt to assets ratio after adjusting for this is 65%.