capital. If this is the hurdle rate we want our long-term
investmentsto beat,wewanttherateto reflectthecost of
long-termborrowingandnotshort-termborrowing.Afterall,
afirmthatfundslong-termprojectswithshort-termdebtwill
have to return to the market to roll over this debt.
All Lease Commitments
Theessentialcharacteristicofdebtisthatitgives risetoa
tax-deductibleobligationthatfirmshavetomeetinbothgood
times and bad, and thefailure to meet this obligation can
resultinbankruptcyorlossofequitycontroloverthefirm.If
weusethisdefinitionofdebt,itisquiteclearthatwhatwesee
reportedonthebalancesheetasdebtmaynotreflectthetrue
borrowingsofthefirm.In particular,a firmthatleasesits
assets and categorizes them as operating leases owes
substantially more than is reported in the financial statements.
53 Afterall,afirmthatsignsaleasecommitstomakingthe
leasepaymentinfutureperiodsandrisksthelossofassetsif
itfailstomakethecommitment.Forfinancialanalysis,we
should treat all lease payments as financial expenses and
convertfuture leasecommitments intodebtby discounting
them backto the present,using thecurrent pretaxcost of
borrowing for thefirm as thediscount rate. The resulting
presentvaluecanbeconsideredthedebtvalueofoperating
leasesandcanbeaddedontothevalueofconventionaldebt
toarriveatatotaldebtfigure.Tocompletetheadjustment,
the operating income of the firm will also have to be restated: