On the forecasting of lease expense in firm valuation

L. Peter Jennergren ()
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L. Peter Jennergren: Department of Accounting, Postal: Stockholm School of Economics, P.O. Box 6501, SE-113 83 Stockholm, Sweden

No 2009:12, SSE/EFI Working Paper Series in Business Administration from Stockholm School of Economics

Abstract: The forecasting of operating lease expense in valuation models like the discounted dividends model is more complex than the forecasting of non-lease cash operating expense. The reason is that lease expense depends on past real growth and inflation, due to the long lives of the leased assets, whereas non-lease cash operating expense depends only on this year's nominal sales revenue. Naive forecasting (as if lease expense depends only on current nominal sales revenue) can have a noticeable impact on the calculated value of the equity, if the company is a heavy user of leased equipment and has experienced rapid real growth in recent years. It is shown how lease expense can be forecasted, without capitalizing, in a fashion that does take into account the dependence on past real growth and inflation. Operational leases also affect the cost of capital for discounting, since they represent debt, even if not capitalized. Hence they enter into the financing structure that goes into the cost of capital. An illustrative stylized example is used throughout.

Keywords: Leasing; valuation; accounting data; discounted dividends (search for similar items in EconPapers)
Pages: 20 pages
Date: 2009-06-29, Revised 2010-02-22
New Economics Papers: this item is included in nep-for
Note: The first part of this working paper has been revised and published. The second part of this working paper has been revised and put into S-WoBA 2011:3.
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published as Jennergren, L. Peter, 'On the Forecasting of Net Property, Plant and Equipment and Depreciation in Firm Valuation by the Discounted Cash Flow Model' in Journal of Business Valuation and Economic Loss Analysis, 2010.

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Persistent link: https://EconPapers.repec.org/RePEc:hhb:hastba:2009_012

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