Please use this identifier to cite or link to this item: http://hdl.handle.net/1959.14/98575
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- Title
- Leases, debt and value
- Related
- Journal of applied research in accounting and finance, Vol. 4, No. 1 (2009), p.3-29
- Related
- http://www.mgsm.edu.au/wps/wcm/connect/Internet/Root/research/publications/journals/jaraf/2009jul/
- Publisher
- Macquarie Graduate School of Management
- Date
- 2009
- Author/Creator
- Damodaran, Aswath
- Description
- When analyzing or the value of a firm, there are three basic questions that we need to address: How much is the firm generating as earnings? How much capital has been invested in its existing investments? How much has the firm borrowed? In answering these questions, we depend upon accounting assessments of earnings, book capital and debt. We assume that the reported operating income is prior to any financing expenses and that all debt utilized by the firm is treated as such on the balance sheet. While this assumption, for the most part, is well founded, there is a significant exception. When a firm leases an asset, the accounting treatment of the expense depends upon whether it is categorized as an operating or a capital lease. Operating lease payments are treated as part of operating expenses, but we will argue that they are really financing expenses. Consequently, the stated operating income, capital, profitability and cash flow measures for firms with operating leases have to be adjusted when operating lease expenses get categorized as financing expenses. This can have far reaching implications for profitability, financial leverage and assessed value at firms.
- Description
- 27 page(s)
- Resource Type
- Journal Of Applied Research In Accounting And Finance Collection
- Resource Type
- journal article
- Organisation
- Macquarie University. Macquarie Graduate School of Management
- Identifier
- http://hdl.handle.net/1959.14/98575
- Identifier
- ISSN:1834-2590
- Identifier
- mq-20101029-09578
- Language
- eng
- Rights
- Publisher version archived with the permission of the publisher Macquarie Graduate School of Management, Macquarie University, NSW, Australia. This archived copy is available for individual, non-commercial use. Permission to use this version for other uses must be obtained from the publisher.
- Full Text
- Reviewed
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