Santa Corporation
NOTE: These Multiple Choice Questions Require Present

question 20

Multiple Choice

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.
$\begin{array}{llll}&\underline{2012}&\underline{2011}&\underline{2010}\\\text { Property, Plant, \& Equipment (net) } &\$882,468&\$717,453&\$658,214 \\\text { Total Assets } &1,756,854 & \$ 1,405,484 & 1,254,896 \\\text { Common Shareholders'Equity } & 867,992&652,626&587,951 \\ & \\\text { Sales } & \$ 2,922,915 & \$ 2,415,632 \\\text { Cost of GoodsSold } & 2,016,811 & 1,642,630 \\\text { Depreciation Expense } & 78,584 & 67,542 \\\text { Interest Expense } & 106,663 & 90,343 \\\text { Net Income } & 248,448 & 217,407\end{array}$


$\begin{array}{|l|l|}\hline & \text { Sant Corp. } \\\hline & \text { Operating Lease Disclosure } \\\hline & \text { (amounts in thousands) } \\\hline & \\\hline & \text { Operating Lease Commitments } \\\hline & \text { at the end of } 2012 \\\hline & \\\hline & \\\hline \text { Year} & \text { Reported Lease Commitments } \\\hline 2013& \$ 148,239 \\\hline 2014 & \$ 252,800 \\\hline2015 & \$ 278,327 \\\hline 2016 & \$ 279,210 \\\hline 2017& \$ 285,452 \\\hline\text { Beyond } 2017 & \$ 2,471,600 \\\hline \end{array}$
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Assuming that Santa Corporation was required to capitalize its operating lease how would the company's fixed asset ratio change under this assumption.

• A) increase
• B) decrease
• C) no effect
• D) unable to determine

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Definitions:

Machine Purchase

The acquisition of industrial or office machinery, usually considered a long-term investment in assets.

Extraordinary Repair

Major repairs extending the useful life of an asset far beyond the normal maintenance.

Betterment

The act of improving or increasing the value of an asset or property through enhancements or upgrades.

Capital Expenditure

Financial resources deployed by a business to buy or enhance tangible assets like real estate, factories, or machinery.