To improve comparability over time, an analyst has decided to capitalize the operating leases of Company A in its pre-IFRS 16 financial statements. Using the information in the notes to the companys 2017 financial statements, she has determined that the present value of future minimum lease payments, at a discount rate of 10 per cent, on December 31, 2017, equals 500 million. All lease contracts last another 5 years on December 31, 2017. As expected at the beginning of the year, the company reports an operating lease expense in its income statement for 2018 of 80 million. The companys tax rate equals 30 per cent. The company does not engage in any new operating leases in 2018. The following information is also available from Company As financial statements (all ratios use beginning-of-the-year balance sheet values)

Debt to capital (at beginning of 2018)	0.55
Return on beginning equity in 2018	0.10
Assets / Capital (at beginning of 2018)	3,400 million

The effect of capitalizing Company As operating leases on its return on beginning equity in 2018 equals :

1. A decrease from 0.10 to 0.07 (rounded).

2. An increase from 0.10 to 0.15 (rounded). 3. An increase from 0.10 to 0.13 (rounded).

4. A decrease from 0.10 to 0.05 (rounded).

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