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, Working Paper Series in Business Administration from Stockholm School of Economics

Abstract: The forecasting of lease expense in valuation models like the discounted cash flow model and 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. For that reason, the recommendation is to capitalize operating leases, since that facilitates correct forecasting of lease expense. 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. An illustrative example is used throughout. This paper extends Jennergren 2008a and Jennergren 2008b.

Keywords: Leasing; valuation; accounting data; discounted free cash flow; discounted dividends (search for similar items in EconPapers)
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Date: 2009-06-29
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