Consider a random grocery store named X. It reports a book value of equity 3000 and has no debt on it's balance sheet. It has a number of lease agreements, with yearly payments shown in the table below:

The firm's before tax cost of debt is 6%, and the tax rate is 25%.

1. What is the debt value of the firm's operating leases?

2. How would treating operating leases as debt affect the book value of debt-to-equity ratio?

Year 1 2 3 Lease payment 500 500 400 400 300 4 5