Walgreen Co. (Walgreens) is based in Illinois and was originally incorporated in 1909. As of August 31, 2009, it operated 7,496 locations in 50 states, the District of Columbia, Puerto Rico, and Guam. Walgreens' 2009 net income was $2,006 million, and its interest expense was $91 million. The company faced a 37% effective tax rate. At August 31, 2009, the balance sheet showed $25,142 million of assets and liabilities of $10,766 million. Excerpts from the 2009 annual report that relate to leases are reported
Required:
All questions relate to 2009 unless stated otherwise.
1. Compute Walgreens' debt-to-equity ratio and return-on-assets ratio using reported numbers for fiscal 2009.
2. Assume that the amount of Walgreens' operating lease payment due each year after 2014 is equal and is paid at the end of each fiscal year. Assume that all of these leases terminate at the end of fiscal 2027. Using an interest rate of 7%, calculate the present value of the operating lease payments at August 31, 2009.
3. Make the journal entry that would be necessary at August 31, 2009, to put the operating leases on the balance sheet. Ignore income taxes and assume that the amount of the capitalized asset equals the capitalized liability.
4. Based on your answer to requirement 2, make the necessary journal entries related to the income statement for the fiscal year ended August 31, 2010, assuming operating leases are accounted for as capital leases. Assume an 18-year useful life, zero salvage value, and straight-line depreciation for the capitalized leased assets.
5. Calculate Walgreens' total debt to shareholders' equity ratio after treating its operating leases as capital leases.
6. Calculate Walgreens' return on assets. Use the income information that you computed for requirement 4.
7. Comment on the differences between the unadjusted ratios in requirement 1 and the adjusted ratios in requirements 5 and 6.