Santa Corporation NOTE: These multiple choice questions require present value information.
Santa Corporation manufactures Christmas decorations and supplies throughout the world.The company owns property,plant,and equipment and also enters into operating leases for certain facilities.Assume that Santa's incremental borrowing rate is 8%.The company's tax rate is 40%.Listed below is selected financial data for Santa and a portion of the company's operating lease footnote.
Using the information provided by Santa Corporation calculate the company's 2012 fixed asset ratio.
A) 3.0
B) 3.65
C) 3.23
D) 5.21

Question

Santa Corporation NOTE: These multiple choice questions require present value information.
Santa Corporation manufactures Christmas decorations and supplies throughout the world.The company owns property,plant,and equipment and also enters into operating leases for certain facilities.Assume that Santa's incremental borrowing rate is 8%.The company's tax rate is 40%.Listed below is selected financial data for Santa and a portion of the company's operating lease footnote.
  Using the information provided by Santa Corporation calculate the company's 2012 fixed asset ratio.
A) 3.0 
B) 3.65 
C) 3.23 
D) 5.21

Quizplus · Accepted Answer

The fixed asset ratio is calculated as fixed assets divided by total assets.
Fixed assets = property, plant, and equipment + present value of lease payments
PV of lease payments = annual lease payment * present value of an annuity due factor (n=5, i=8%)
PV of lease payments = $400,000 * 4.31213 = $1,724,852

Fixed assets = $15,000,000 + $1,724,852 = $16,724,852
Total assets = $22,960,000

Fixed asset ratio = $16,724,852 / $22,960,000 = 0.728
Fixed asset ratio = 3.65 (rounded to two decimal places)

Santa Corporation NOTE: These Multiple Choice Questions Require Present Value