Derra Foods is a specialty food retailer. In its balance sheet, the firm reports $1 billion in book value of equity and no debt, but it has operating leases on all its stores. In the most recent year, the firm made $85 million in operating lease payments and its commitments to make lease payments for the next 5 years and beyond are summarized.
|
Year |
Operating Lease Expense |
|
1 |
$ 90 million |
|
2 |
$ 90 million |
|
3 |
$ 85 million |
|
4 |
$ 80 million |
|
5 |
$ 80 million |
|
10-Jun |
$ 75 million annually |
If the firm”s current cost of borrowing is 7%, estimate the debt value of operating leases. Estimate the book value debt to equity ratio.