Starbucks consolidated balance sheet as of September 30, 2012, reports $549.6 million in longterm debt and $5,046.2

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Question:

Starbucks’ consolidated balance sheet as of September 30, 2012, reports $549.6 million in longterm debt and $5,046.2 million in total shareholders’ equity. Therefore, the long-term debt to longterm capital ratio, defined as Long-Term debt/(Long-Term Debt þ Shareholders’ Equity), is 9.71%.

In the MD&A and notes to the financial statements, Starbucks also reports additional information relative to its reported debt and equity:

In addition, as is common practice for fast-food and retail coffee shop chains, Starbucks leases some or all of its retail space under operating leases. Note 10 to Starbuck’s consolidated financial statements for the fiscal year ending September 30, 2012, provides the following future operating lease commitments of Starbucks as of the end of the fiscal year (amounts in millions).

REQUIRED

a. Compute the present value of operating lease obligations using a 6.25% discount rate. Assume that all cash flows occur at the end of each year. Also assume that the minimum lease payments after 2017 occur evenly over a five-year period.

b. Recompute the long-term debt to long-term capital ratio assuming that Starbucks capitalizes operating leases and reports the long-term portion as part of long-term debt.

c. Recompute the long-term debt to long-term capital ratio assuming that the long-term portion of operating leases are treated as long-term debt and using market values of long-term debt and equity.

d. Comment on the results from Requirements b and c. What additional insights do these alternative calculations provide?

e. Starbucks reports an expense labeled ‘‘Cost of Sales including Occupancy Costs’’ on its income statement. Speculate why Starbucks reports cost of sales and occupancy (operating lease payments) costs as a combined amount on the income statement.