Lowe's Companies, Inc., reports the following footnote relating to its leased facilities in its fiscal 2012 10-K report for the year ended February 1, 2013.

a. Using your financial calculator or Excel spreadsheet, confirm that Lowe's capitalized its capital leases using a rate of \(9.47 \%\). Lowe's labels its capital leases "Lease Obligations."

b. What effect does the failure to capitalize operating leases have on Lowe's balance sheet? Over the life of the lease, what effect does this classification have on net income?

c. Compute the present value of these operating leases using a discount rate of \(9 \%\) and round the remaining lease term to the nearest whole year. How might we use this information in our analysis of the company?

Transcribed Image Text:

The Company leases facilities and land for certain facilities under agreements with original terms generally of 20 years.... The future minimum rental payments required under operating leases and capitalized lease obligations having initial or remaining noncancelable lease terms in excess of one year are summarized as follows: (In millions) 2013.. 2014 2015 2016 2017 Later years Total minimum lease ayments Less amount representing interest.. Present value of minimum lease payments. Less current maturities.... Present value of minimum lease payments, less current maturities... Operating Leases $ 420 412 409 406 395 3,478 $5,520 Lease Obligations $ 79 76 68 56 46 383 708 (289) 419 $375 (44) Total $ 499 488 477 462 441 3,861 $6,228