I am lost with this question and do not know where to start.
Construct a pro forma balance sheet (at 12/31/15) for Southwest assuming it had capitalized its operating leases. (There is an Excel template provided.) Use the cash flow pattern from Requirement 2(b) and the discount rate from Requirement 3(d). Assume the pro forma asset and debt amounts related to the operating leases are equal in amount. (You need not worry about the separate effects of constructive capitalization on the portions of debt classified as current and noncurrent. Treat all debt as a single balance sheet line item.) How does the constructive capitalization affect the company’s debt to total capital (where total capital is debt plus equity) ratio?
In this part, you will perform some sensitivity analyses to determine the extent to which your assumptions affect your results.
a) Repeat Requirement 4 using the cash flow pattern from Requirement 2(c), holding all other assumptions the same. How sensitive is your analysis to the cash flow assumption you made?
b) Repeat Requirement 4 using discount rates that are one percentage point higher and one percentage point lower than in your original analysis in Requirement 4, holding all other assumptions constant. How sensitive is your analysis to the discount rate assumption you made?
Note: In parts 5(a) and 5(b), you should present the pro forma balance sheets under the revised assumptions and then discuss the sensitivities. Do not skip presentation of the pro forma balance sheets.