if you capitalize expenses what is the effect on: ROA / ROE D/E if you capitalize a lease what is the effect on those two? is it the same?
Capitalize expense: ROA/ROE decreases, D/E increases Lease - the effect is reverse…
actually for firms that capitalize expenses, the ROA and ROE will be higher (the increase in NI will outweight the increase in assets). Debt/Equity will also be lower, as higher NI will increase equity and thus cause the deominator to be larger under capitalization of expenses. with capital leases, both ROA and ROE will be lower, as you will record lower net income in the earlier years. Additionally, bringing a capital lease onto your balance sheet will result in an increase in a debt-like liability, which will have the effect making your total debt number higher. So with higher debt, and lower equity due to lower net income, your debt to equity balance will be higher.
THAT’S WHY I’VE BEEN GETTING THOSE WRONG! it thought they were the same … thank you!
Oops… i wrote it wrong… i guess i should call it a day… The way i remember it is… for capitalized expense… everything is high except D/E… and vice versa for capital lease… is that correct MIB…
capitalizing hurts most of the ratios that’s what i remember
think about it…i capitalize an asset instead of expensing it right away, my NI will be higher. So right there we know that equity will be higher since NI flows through equity. So both ROE will be higher and debt/equity will be lower just on that alone. With ROA both NI increases and so do assets, but the NI portion (the numerator) will always have a larger effect than the increase in assets, so yes, ROA will be higher. with the capital lease, not only do you have interest expense but you also have depreciation, which will cause NI to be lower. As a result ROA will definitely be lower due to increased assets and lower NI. ROE will definitely be lower due to lower NI. And debt will be higher because the capital lease carries a debt like liability on the balance sheet. so with lower NI (translates to lower equity) and higher debt balances, you will have a higher debt/equity ratio. if you do not understand these concepts, you can probably kiss about 5-7 questions goodbye on the exam.
Got it…Thanks… Good Luck