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Approximate Firm Valuation with Operating Leases

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  • Jennergren L. Peter

    (Stockholm School of Economics)

Abstract

Operating leases are quite important in some industries. There are two possible errors that should be avoided when valuing a company with operating leases. First, one should not neglect the implied lease debt. Such neglect distorts the calculation of free cash flow, required rate of return on the equity under partial debt financing, WACC, and residual equity value in the discounted cash flow model. Second, lease expense and implied lease debt should not be forecasted as constant, historical fractions of sales revenue in the (non-steady-state) explicit forecast period. This paper outlines an approximate procedure for handling operating leases in the discounted cash flow model. This procedure avoids the two possible errors that were mentioned.

Suggested Citation

  • Jennergren L. Peter, 2011. "Approximate Firm Valuation with Operating Leases," Journal of Business Valuation and Economic Loss Analysis, De Gruyter, vol. 6(1), pages 1-22, September.
  • Handle: RePEc:bpj:jbvela:v:6:y:2011:i:1:n:2
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    References listed on IDEAS

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    1. Jennergren, L. Peter, 2004. "Continuing Value in Firm Valuation by the Discounted Cash Flow Model," SSE/EFI Working Paper Series in Business Administration 2004:15, Stockholm School of Economics.
    2. Vivien Beattie & Alan Goodacre & Sarah Thomson, 2000. "Recognition versus Disclosure: An Investigation of the Impact on Equity Risk Using UK Operating Lease Disclosures," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 27(9&10), pages 1185-1224.
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    Cited by:

    1. Jennergren, L. Peter, 1998. "A Tutorial on the Discounted Cash Flow Model for Valuation of Companies," SSE/EFI Working Paper Series in Business Administration 1, Stockholm School of Economics, revised 13 Dec 2011.

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