Air Canada is the largest Canadian airline and is the world's ninth largest passenger airline by number of destinations. The company is headquartered in Montreal, Quebec. Air Canada used Canadian GAAP to prepare its 2012 financial statements. Its footnotes include the following:

Required

a. Combine the principal and interest payments for the company's finance lease obligations reported in the "Maturity Analysis" footnote to determine the total annual finance lease payments. Confirm that the implicit rate that Air Canada used to capitalize these leases was \(9.4 \%\).

b. The company explains its "adjusted net debt" in its footnotes. Why is this a metric that airline industry analysts might want to use?

c. Recompute the "capitalized operating leases" of \(\$ 2,352\) million reported in the last footnote shown above using the method described in the note (1) below the table.

d. Use the reported Operating Lease Commitments footnote to determine an independent estimate of the amount that would be capitalized if the company's operating leases were classified as finance leases under IFRS. Use a discount rate of \(9.4 \%\).

e. Compare the amounts we obtained in parts \(c\) and \(d\) above. Why might the two be different?

f. Indicate the direction (increase or decrease) of the effect that capitalizing the operating leases would have on the following financial items and ratios for Air Canada: return on equity (ROE), net operating profit after tax (NOPAT), net operating assets (NOA), and measures of financial leverage.

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Operating Lease Commitments The table below pesents the future minimum lease payments under existing operating leases of aircraft and other property as at December 31, 2012. CDN$ millions Aircraft ..... Other property 2013 2014 2015 2016 2017 Thereafter Total $1,437 $318 $253 $207 $174 $152 $333 57 46 43 33 30 142 351 $375 $299 $250 $207 $182 $475 $1,788 MATURITY ANALYSIS Principal and interest repayment requirements as at December 31, 2012 on long-term debt and lease obligations are as follows: Principal 2013 Long-term debt obligations... $446 Finance lease obligations... 60 $506 2014 2015 2016 2017 Thereafter Total $268 $1,383 $473 $555 $519 $3,644 56 50 25 25 147 363 $324 $1,433 $498 $580 $666 $4,007 Interest 2013 Long-term debt obligations... $220 $201 $140 Finance lease obligations... 34 28 22 $254 $229 $162 Thereafter Total $31 $709 49 166 $875 2014 2015 2016 2017 $49 $68 18 15 $67 $83 $80 The following table reflects Air Canada's adjusted net debt balances as at December 31, 2012 and as at December 31, 2011.