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you have helped me with the calculations thank you very much. please i want you to give me the formulars for the solution how you got the answers i tried doing it myself but i didn't get tge answers please tell me what i will add and the formulars you used ,you can use AMR as an example i will do the rest myself thanks

UAL of operating expenses are variable (75% are fixed). We also assume a 35% tax rate for the changes to income. Recast income statements appear below: AMR Delta Drop in Revenue 5% 10% 5% 10% 5% 10% Revised Income Statement for Yr 8 Operating Revenue 18,245 17,285 13,431 12,724 16,683 15,805 Operating Expenses (16,656) (16,445) (12,289) (12,134) (15,882) (15,681) Operating Income 1,589 840 1142 590 801 124 Other Income & Adjustments 198 198 141 141 133 133 Interest Expense (372) (372) (197) (197) (361) (361) Income before Tax 1,415 666 1,086 534 573 (104) Tax Provision (35% tax rate) (596) (454) (261) (192) 45 Continuing Income 819 332 632 273 381 (59) % drop in Continuing Income 37% 75% 36% 72% 54% 107% Part b continued: The profitability of the airlines is reduced dramatically by moderate revenue shortfalls under our assumptions. A mere 59% dron in revenues can reduce income (333) profits. This happens because of the high proportion of fixed costs in the cost structure. We also examine the impact of the changes on key 1998 ratios: AMR Delta UAL Drop in Revenue 5% 10% 5% 10% 5% 10% Liquidity Current Ratio 0.865 0.865 0.735 0.735 0.513 0.513 Solvency Total Debt to Equity 2.330 2.330 2.630 4.657 Long Term Debt to Equity 1.488 1.488 1.492 2.929 2.929 Times Interest Earned 4.803 2.788 6.511 3.712 2.587 0.712 Return on Investment Return on Total Assets 4.91% 2.66% 5.56% 1.03% Return on Equity 12.68% 5.14% 17.97% 7.77% 13.56% 2.10% The balance sheet ratios do not change. The ROA and ROE mirror the drop in profitability. The most interesting change occurs in interest coverage, which drops significantly 4.657 2.630 1.492 2.94% 3.62% leases to avail themselves of the benefits of operating lease accounting. e. Reclassification of Operating Leases as Capital Leases and Restatement of Financial Statements AMR Operating Delta Operating Captai UAL Operating 1261 191 7 5 12 12480 919 14 5 19 71 48 1 5 6 10360 960 11 5 16 1759 242 7 5 12 17266 1305 13 5 18 Estimate Average Remaining Lease Term (1998) 1 MLP in Later Years 2 MLP in Last Reported Year 3 # of later years (1y (2) 4 Add #of reported years 5 Average Remaining Lease (3)(4) Estimate Average Remaining Lease Term (1997) 1 MLP in Later Years 2 MLP in Last Reported Year 3 # of later years (1y (2) 4 Add #of reported years 5 Average Remaining Lease (3) (4) 1.206 247 1,321 277 5 5 10 13,366 887 15 5 20 118 57 2 5 7 9.780 850 12 5 17 5 5 10 19,562 1,357 14 5 19 AMR Delta UAL 1998 1997 1998 1997 1998 1997 Estimate Interest Rate on Capital Leases 6 MLP During Next Year 273 255 100 101 317 288 7 Less Principal Component 154 135 63 62 176 171 8 Interest (6) -(0) 119 120 37 39 141 117 9 PV of Capital Leases 1.918 1.764 312 384 2.289 1,850 10 Interest Rate (8y(9) 6.20% 6.80% 11.86% 10.16% 6.16% 6.32% Note: The principal component is shown as a current liability on the balance sheet. AMR Delta UAL 1998 1997 1998 1997 1998 1997 Estimate Average MLP per year on Operating Leases 11 Total MLP 17,215 18.115 15, 120 14.020 23.798 26,515 12 Average Remaining Lease 19 20 16 17 18 19 Term 13 Average MLP (11)/(12) 927 903 957 849 1,305 1,366 Estimate Present Value of Operating Leases 14 Present Value Factor 10.8505 10.7762 6.9958 78515 10.7746 11.0047 15 Average MLP (13) 927 903 957 849 1.305 1,366 16 Present Value (14)X(15) 10,053 9,727 6,698 6.669 14,065 15,029 Note: Present value factor represents the present value of an annuity of 1 at a given interest rate and lease term from the annuity tables. We use the interest rate on capital leases (estimated in (10) above as a surrogate interest rate for operating leases. The lease term for operating leases was estimated in (5) above Delta 1998 1997 UAL 1998 1997 AMR 1998 1997 Estimate Average MLP per year on Operating Leases 11 Total MLP 17215 18.115 12 Average Remaining Lease 19 20 13 Average MLP (11)/(12) 927 903 15.120 16 14.020 17 23.798 18 26,515 19 957 849 1,305 1.366 Estimate Present Value of Operating Leases 14 Present Value Factor 10.8505 10.7762 6.9958 78515 10.7746 11.0047 15 Average MLP (13) 927 903 957 849 1,305 1,366 16 Present Value (14)X(15) 10.053 9,727 6.698 6.669 14.065 15,029 Note: Present value factor represents the present value of an annuity of $1 at a given interest rate and lease term from the annuity tables. We use the interest rate on capital leases (estimated in (10) above) as a surrogate interest rate for operating leases. The lease term for operating leases was estimated in (5) above. AMR 1998 Delta 1998 UAL 1998 6,669 10% 677 E.Estimate Interest and Depreciation on Operating Lease 17 Present Value of Operating Leases 9.727 18 Interest Rate 7% 19 Interest Expense (17) X (18) 662 20 Value of Operating Lease Assets 9.727 Average Remaining Lease 21 Term (Lease Life) 20 22 Depreciation Expense 485 15,029 6% 950 15,029 6,669 17 404 19 774 (774) 1011 F. Estimate Effect of Operating Lease Conversion on Income Statement 23 Increase in Depreciation Expense (485) (404) Decrease in Lease Rental 24 Expense 860 1419 25 Effect on Operating Income 526 456 645 26 Increase in Interest Expense (662) (950) 27 Effect on Income before Tax (135) (306) Decrease in Tax Provision 28 (35%) 47 77 107 29 Effect on Continuing Income (88) (144) (199) Note: For computing interest and depreciation for 1998, we use the lease asset'obligation we estimated at the end of 1997. (221) AMR Delta UAL G. Determine Principal and Interest Component of Next Year's MLP 30 Next Year MLP (1999) 1,012 950 1,320 31 Estimated Interest Component 624 794 866 32 Estimated Principal Component 388 156 454 H. Decompose Operating Lease Liability into Current and Non-Current Components 33 Total Operating Lease Liability 10,053 6,698 14.065 34 Estimated Current Portion 388 156 454 35 Estimated Non-Current Portion 9,665 6,543 13,611 Restated Balance Sheet 5 Millions AMR Delta UAL 1998 1998 1998 AMR 1998 Delta 1998 UAL 1998 Restated Balance Sheet 5 Millions Assets Current Assets Freehold Assets (Net) Leased Assets (Net) Intangibles & Other Total 4,875 12 239 12.200 3,042 32,356 3.362 9.022 6.997 1.920 21,301 2.908 10.951 16.168 2.597 32,624 542 5.485 11,429 2,436 5.766 Liabilities Current Liabilities: Current Portion of Capital Lease Other Current Liabilities Long Term Liabilities: Lease Liability Long Term Debt Other Long Term Liabilities Preferred Stock Shareholder's Equity Contributed Capital Retained Earnings Treasury Stock Total Restated Income Statement S Millions 219 4,514 6.792 1,533 4,046 175 3,299 1.776 (1.052) 21,301 630 5,492 15,724 2.858 3,848 791 3,257 4.729 (1.288) 32,356 3.518 1,024 (1,261) 32,624 AMR 1998 Delta 1998 UAL 1998 Operating Revenue 19205 (16396) 14138 (119191 17561 (15535) Operating Expenses 1998 should be equal to 80% the liability. However, these ad hoc rules are no better than putting them equal to each other. g. Ratio Analysis on Restated Financial Statements AMR Delta UAL 1998 1998 Liquidity Current Ratio 0.809 0.710 0.475 Solvency Total Debt to Equity 3.831 4.295 8.943 Long Term Debt to Equity 2.931 3.118 7.078 Times Interest Earned 3.020 2.380 1.759 Return on Investment Return on Total Assets 5.89% 7.17% 4.47% Return on Equity 18.69% 23.20% 21.87% *computed on adjusted year. end asset and equity balances Note: We treat preference share capital as debt and include preference dividend with interest. Capitalizing the operating leases significantly worsens the liquidity and solvency picture of all three companies. The impact on current 141 253 Sensitivity Analysis after lease capitalization AMR Delta UAL Drop in demand 10% 5% 10% 10% Revised Income Statement for 1998 Operating Revenue 18245 17285 13431 12724 16683 15805 Operating Expenses (16191) (15986) (11770) (11621) (15340) (15146 Operating Income 2054 1298 1661 1103 1343 659 Other Income & Adjustments 198 198 141 133 133 Interest Expense" (996) 1996) (991) (991) (1227) (1227 Income before Tax 1256 501 811 248 (436) Tax Provision (540) (276) (358) (162) (78) 161 Continuing Income 716 225 453 90 170 (275) % drop in Continuing Income 41% 81% 89% 72% 145% Revised Ratios (1998) Liquidity Current Ratio 0.809 0.809 0.710 0.710 0.475 0.475 Solvency Total Debt to Equity 3.831 3.831 4 295 4.295 8.943 8.943 Long Term Debt to Equity 2.931 2.931 3.118 3.118 7.078 7.078 Times Interest Eamed 2.261 1.503 1.818 1255 1.202 0.645 Return on Investment Return on Total Assets 4.33% 2.77% 5.39% 3.61% 3.07% 1.66% Return on Equity 10.69% 3.36% 11.26% 2.24% 5.18% -8.37% The sensitivity analysis after the capitalization If onerating leases further hiahliants the hiah UAL of operating expenses are variable (75% are fixed). We also assume a 35% tax rate for the changes to income. Recast income statements appear below: AMR Delta Drop in Revenue 5% 10% 5% 10% 5% 10% Revised Income Statement for Yr 8 Operating Revenue 18,245 17,285 13,431 12,724 16,683 15,805 Operating Expenses (16,656) (16,445) (12,289) (12,134) (15,882) (15,681) Operating Income 1,589 840 1142 590 801 124 Other Income & Adjustments 198 198 141 141 133 133 Interest Expense (372) (372) (197) (197) (361) (361) Income before Tax 1,415 666 1,086 534 573 (104) Tax Provision (35% tax rate) (596) (454) (261) (192) 45 Continuing Income 819 332 632 273 381 (59) % drop in Continuing Income 37% 75% 36% 72% 54% 107% Part b continued: The profitability of the airlines is reduced dramatically by moderate revenue shortfalls under our assumptions. A mere 59% dron in revenues can reduce income (333) profits. This happens because of the high proportion of fixed costs in the cost structure. We also examine the impact of the changes on key 1998 ratios: AMR Delta UAL Drop in Revenue 5% 10% 5% 10% 5% 10% Liquidity Current Ratio 0.865 0.865 0.735 0.735 0.513 0.513 Solvency Total Debt to Equity 2.330 2.330 2.630 4.657 Long Term Debt to Equity 1.488 1.488 1.492 2.929 2.929 Times Interest Earned 4.803 2.788 6.511 3.712 2.587 0.712 Return on Investment Return on Total Assets 4.91% 2.66% 5.56% 1.03% Return on Equity 12.68% 5.14% 17.97% 7.77% 13.56% 2.10% The balance sheet ratios do not change. The ROA and ROE mirror the drop in profitability. The most interesting change occurs in interest coverage, which drops significantly 4.657 2.630 1.492 2.94% 3.62% leases to avail themselves of the benefits of operating lease accounting. e. Reclassification of Operating Leases as Capital Leases and Restatement of Financial Statements AMR Operating Delta Operating Captai UAL Operating 1261 191 7 5 12 12480 919 14 5 19 71 48 1 5 6 10360 960 11 5 16 1759 242 7 5 12 17266 1305 13 5 18 Estimate Average Remaining Lease Term (1998) 1 MLP in Later Years 2 MLP in Last Reported Year 3 # of later years (1y (2) 4 Add #of reported years 5 Average Remaining Lease (3)(4) Estimate Average Remaining Lease Term (1997) 1 MLP in Later Years 2 MLP in Last Reported Year 3 # of later years (1y (2) 4 Add #of reported years 5 Average Remaining Lease (3) (4) 1.206 247 1,321 277 5 5 10 13,366 887 15 5 20 118 57 2 5 7 9.780 850 12 5 17 5 5 10 19,562 1,357 14 5 19 AMR Delta UAL 1998 1997 1998 1997 1998 1997 Estimate Interest Rate on Capital Leases 6 MLP During Next Year 273 255 100 101 317 288 7 Less Principal Component 154 135 63 62 176 171 8 Interest (6) -(0) 119 120 37 39 141 117 9 PV of Capital Leases 1.918 1.764 312 384 2.289 1,850 10 Interest Rate (8y(9) 6.20% 6.80% 11.86% 10.16% 6.16% 6.32% Note: The principal component is shown as a current liability on the balance sheet. AMR Delta UAL 1998 1997 1998 1997 1998 1997 Estimate Average MLP per year on Operating Leases 11 Total MLP 17,215 18.115 15, 120 14.020 23.798 26,515 12 Average Remaining Lease 19 20 16 17 18 19 Term 13 Average MLP (11)/(12) 927 903 957 849 1,305 1,366 Estimate Present Value of Operating Leases 14 Present Value Factor 10.8505 10.7762 6.9958 78515 10.7746 11.0047 15 Average MLP (13) 927 903 957 849 1.305 1,366 16 Present Value (14)X(15) 10,053 9,727 6,698 6.669 14,065 15,029 Note: Present value factor represents the present value of an annuity of 1 at a given interest rate and lease term from the annuity tables. We use the interest rate on capital leases (estimated in (10) above as a surrogate interest rate for operating leases. The lease term for operating leases was estimated in (5) above Delta 1998 1997 UAL 1998 1997 AMR 1998 1997 Estimate Average MLP per year on Operating Leases 11 Total MLP 17215 18.115 12 Average Remaining Lease 19 20 13 Average MLP (11)/(12) 927 903 15.120 16 14.020 17 23.798 18 26,515 19 957 849 1,305 1.366 Estimate Present Value of Operating Leases 14 Present Value Factor 10.8505 10.7762 6.9958 78515 10.7746 11.0047 15 Average MLP (13) 927 903 957 849 1,305 1,366 16 Present Value (14)X(15) 10.053 9,727 6.698 6.669 14.065 15,029 Note: Present value factor represents the present value of an annuity of $1 at a given interest rate and lease term from the annuity tables. We use the interest rate on capital leases (estimated in (10) above) as a surrogate interest rate for operating leases. The lease term for operating leases was estimated in (5) above. AMR 1998 Delta 1998 UAL 1998 6,669 10% 677 E.Estimate Interest and Depreciation on Operating Lease 17 Present Value of Operating Leases 9.727 18 Interest Rate 7% 19 Interest Expense (17) X (18) 662 20 Value of Operating Lease Assets 9.727 Average Remaining Lease 21 Term (Lease Life) 20 22 Depreciation Expense 485 15,029 6% 950 15,029 6,669 17 404 19 774 (774) 1011 F. Estimate Effect of Operating Lease Conversion on Income Statement 23 Increase in Depreciation Expense (485) (404) Decrease in Lease Rental 24 Expense 860 1419 25 Effect on Operating Income 526 456 645 26 Increase in Interest Expense (662) (950) 27 Effect on Income before Tax (135) (306) Decrease in Tax Provision 28 (35%) 47 77 107 29 Effect on Continuing Income (88) (144) (199) Note: For computing interest and depreciation for 1998, we use the lease asset'obligation we estimated at the end of 1997. (221) AMR Delta UAL G. Determine Principal and Interest Component of Next Year's MLP 30 Next Year MLP (1999) 1,012 950 1,320 31 Estimated Interest Component 624 794 866 32 Estimated Principal Component 388 156 454 H. Decompose Operating Lease Liability into Current and Non-Current Components 33 Total Operating Lease Liability 10,053 6,698 14.065 34 Estimated Current Portion 388 156 454 35 Estimated Non-Current Portion 9,665 6,543 13,611 Restated Balance Sheet 5 Millions AMR Delta UAL 1998 1998 1998 AMR 1998 Delta 1998 UAL 1998 Restated Balance Sheet 5 Millions Assets Current Assets Freehold Assets (Net) Leased Assets (Net) Intangibles & Other Total 4,875 12 239 12.200 3,042 32,356 3.362 9.022 6.997 1.920 21,301 2.908 10.951 16.168 2.597 32,624 542 5.485 11,429 2,436 5.766 Liabilities Current Liabilities: Current Portion of Capital Lease Other Current Liabilities Long Term Liabilities: Lease Liability Long Term Debt Other Long Term Liabilities Preferred Stock Shareholder's Equity Contributed Capital Retained Earnings Treasury Stock Total Restated Income Statement S Millions 219 4,514 6.792 1,533 4,046 175 3,299 1.776 (1.052) 21,301 630 5,492 15,724 2.858 3,848 791 3,257 4.729 (1.288) 32,356 3.518 1,024 (1,261) 32,624 AMR 1998 Delta 1998 UAL 1998 Operating Revenue 19205 (16396) 14138 (119191 17561 (15535) Operating Expenses 1998 should be equal to 80% the liability. However, these ad hoc rules are no better than putting them equal to each other. g. Ratio Analysis on Restated Financial Statements AMR Delta UAL 1998 1998 Liquidity Current Ratio 0.809 0.710 0.475 Solvency Total Debt to Equity 3.831 4.295 8.943 Long Term Debt to Equity 2.931 3.118 7.078 Times Interest Earned 3.020 2.380 1.759 Return on Investment Return on Total Assets 5.89% 7.17% 4.47% Return on Equity 18.69% 23.20% 21.87% *computed on adjusted year. end asset and equity balances Note: We treat preference share capital as debt and include preference dividend with interest. Capitalizing the operating leases significantly worsens the liquidity and solvency picture of all three companies. The impact on current 141 253 Sensitivity Analysis after lease capitalization AMR Delta UAL Drop in demand 10% 5% 10% 10% Revised Income Statement for 1998 Operating Revenue 18245 17285 13431 12724 16683 15805 Operating Expenses (16191) (15986) (11770) (11621) (15340) (15146 Operating Income 2054 1298 1661 1103 1343 659 Other Income & Adjustments 198 198 141 133 133 Interest Expense" (996) 1996) (991) (991) (1227) (1227 Income before Tax 1256 501 811 248 (436) Tax Provision (540) (276) (358) (162) (78) 161 Continuing Income 716 225 453 90 170 (275) % drop in Continuing Income 41% 81% 89% 72% 145% Revised Ratios (1998) Liquidity Current Ratio 0.809 0.809 0.710 0.710 0.475 0.475 Solvency Total Debt to Equity 3.831 3.831 4 295 4.295 8.943 8.943 Long Term Debt to Equity 2.931 2.931 3.118 3.118 7.078 7.078 Times Interest Eamed 2.261 1.503 1.818 1255 1.202 0.645 Return on Investment Return on Total Assets 4.33% 2.77% 5.39% 3.61% 3.07% 1.66% Return on Equity 10.69% 3.36% 11.26% 2.24% 5.18% -8.37% The sensitivity analysis after the capitalization If onerating leases further hiahliants the hiah

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