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Difference Equation Solutions to the Valuation of Lease Contracts

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  • Steele, Anthony

Abstract

In recent articles, Myers, Dill, and Bautista [15] (MDB) and Franks and Hodges [7] (FH) provide valuable contributions to the leasing literature. MDB derive a simple formula for lease valuation in a Modigliani-Miller world with corporate taxes. The paper by FH presents a simpler derivation of the same formula. FH also extend MDB's analysis to consider the empirically significant case of a lessee company currently in a non-tax-paying position, but which expects to resume paying taxes at some (specified) future date. The work of FH is important here in laying bare the economics of leasing. Temporary non-tax-paying lessees joining tax-paying lessors in non-zero-sum contracts; however, their paper leaves the problem as a programming application. This paper explores the difference equations underlying the MDB-FH approach for finding the adjusted present value of the lease contract. It is found that the order of the system of difference equations depends on the treatment of taxation complexities. Also described is a simple procedure for solving these higher-order difference equations to find the appropriate adjusted discount rates to use in MDB's lease valuation formula, extending its application to these more complex tax situations. The paper is set out in six sections.

Suggested Citation

  • Steele, Anthony, 1984. "Difference Equation Solutions to the Valuation of Lease Contracts," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 19(3), pages 311-328, September.
    • Handle: RePEc:cup:jfinqa:v:19:y:1984:i:03:p:311-328_02
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    Cited by:

    1. Maria Trojanek & Marcin Anholcer & Audrius Banaitis & Radoslaw Trojanek, 2018. "A Generalised Model of Ground Lease Pricing," Sustainability, MDPI, vol. 10(9), pages 1-21, September.
    2. Frank Figge & Tobias Hahn, 2004. "Environmental Shareholder Value Matrix. Konzeption, Anwendung und Berechnung," Others 0408009, University Library of Munich, Germany.

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