CFA Level I · CFA Level I Exam · Credit Analysis for Corporate Issuers
When analyzing a corporate issuer, an analyst adds capitalized operating lease obligations to reported debt. This adjustment will most likely:
Adding capitalized lease obligations to reported debt most likely increases measured leverage. Total debt rises, so ratios such as debt to EBITDA go up, and the adjustment improves comparability between firms that lease assets and those that borrow to buy them.
- Adecrease the debt-to-EBITDA ratio
- Bincrease the issuer's measured leverageCorrect
- Cleave measured leverage unchanged
Explanation
Adding lease obligations raises total debt, so debt-based leverage ratios such as debt/EBITDA rise (unless EBITDA is also adjusted, which rises only by lease expense and typically by less). The adjustment makes leverage comparable across firms that lease versus buy.
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