The following selected information was taken from the financial statements of Krispy Kreme Doughnuts, Inc.

Note 10. Lease Commitments
The Company conducts some of its operations from leased facilities and, additionally, leases certain equipment under operating leases. Generally, these have initial terms of 3 to 20 years and contain provisions for renewal options of 5 to 10 years. At January 28, 2007, future minimum annual rental commitments, gross, under non-cancelable operating leases, including lease commitments on consolidated joint ventures, are as follows:

Rent expense, net of rental income, totaled $24.2 million in fiscal 2005, $23.5 million in fiscal 2006 and $17.7 million in fiscal 2007.
(a) Calculate each of the following ratios for 2007 and 2006.
(1) Current ratio.
(2) Free cash flow.
(3) Debt to total assets ratio.
(b) Comment on Krispy Kreme’s liquidity and solvency.
(c) Read the company’s note on leases (Note 10). If the operating leases had instead been accounted for like a purchase, assets and liabilities would have increased by approximately $135,000,000. Recalculate the debt to total assets ratio for 2007 and discuss the implications foranalysis.

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