IDEAS home Printed from
   My bibliography  Save this paper

Firm Valuation with Operating Leases


  • Jennergren, L. Peter

    () (Dept. of Business Administration, Stockholm School of Economics)


Operating leases are quite important in some industries. There are two possible errors that should be avoided when valuing a company with operating leases. In the first place, 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. In the second place, 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 valuation models, in particular the discounted cash flow model. This procedure avoids the two possible errors that were mentioned and is shown to result in equity values that are very close to the known, exact values in a stylized example problem. Naive valuation (that makes both errors) results in equity values that can be quite far away from those same known, exact values.

Suggested Citation

  • Jennergren, L. Peter, 2011. "Firm Valuation with Operating Leases," SSE/EFI Working Paper Series in Business Administration 2011:3, Stockholm School of Economics, revised 30 May 2011.
  • Handle: RePEc:hhb:hastba:2011_003

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    More about this item


    Operating leases; valuation; discounted cash flow; adjusted present value;

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hhb:hastba:2011_003. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Helena Lundin). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.