Question

please explain how to get those numbers(in red) by showing the formulas

Question 1 8 marks BAV Energy has provided electricity and gas to thousands of households and companies. Recently, the new CEO of BAV Energy, who began in the CEO position 3 months ago, announced that the company has a plan to borrow a loan from banks. A credit analyst is examin ing the company's financial statements of 2018 and finds the following information for its operating leases: Year Lease payments 2022 2019 2020 2021 2023 13.31 12.1 14.64 11 16.11 The company also reported the following information in its 2018 annual reports: Total debt $1,000 Total equity $2,000 Earnings before interest and tax (EBIT) $500 $10 Lease payment Interest expense$100 Reauired: 1. Assume the company has a cost of debt of 10%. Estimate the present value of the leased assets. (2 marks) Present value of the leased assets $50 2. Make accounting adjustments to accounting numbers in the financial statement to convert the operating lease into capital lease. (4 marks) increase long-term Assets by 50 increase long-term liability by 50 decrease operating expense (lease payment) by 10 increase interest expense by 5 increase depreciation expense by 10

Answer 1

1. The PV of lease payments is given by

PV= 11/1.1 + 12.1/1.1^2 + 13.31/1.1^3+14.64/1.1^4+16.11/1.1^5

PV= 50

2)

Now this PV is an asset for RIght of Use

So asset size increases by 50

Long term liability also goes up by 50

Operating expense reduces by 10

Amortization of ROU asset goes up by 10 (50/5)

Interest expense increases by 50*10%= 5