51 Therearesomewhoarguethatstockpricesaremuchmore
volatilethantheunderlyingtruevalue.Evenifthisargument
isjustified(andithasnotconclusivelybeenshowntobeso),
thedifferencebetweenmarketvalueandtruevalueislikelyto
bemuchsmallerthanthedifferencebetweenbookvalueand
true value.
52 Toillustratethispoint,assumethatthemarketvaluedebt
ratio is 10 percent, while thebook value debt ratio is 30
percent,forafirmwithacostofequityof 15 percentandan
after-taxcostofdebtof 5 percent.Thecostofcapitalcanbe
calculated as follows:
With market value debt ratios: 15%(.9) + 5%(.1) = 14%
With book value debt ratios: 15%(.7) + 5%(.3) = 12%
53 Inanoperatinglease,thelessor(orowner)transfersonly
therighttousethepropertytothelessee.Attheendofthe
lease period, the lesseereturns the propertyto the lessor.
Sincethelesseedoesnotassumetheriskofownership,the
leaseexpenseistreatedasanoperatingexpenseintheincome
statementandtheleasedoesnotaffectthebalancesheet.Ina
capital lease, the lessee assumes some of the risks of
ownershipandenjoyssomeofthebenefits.Consequently,the
lease,whensigned,isrecognizedbothasanassetandasa
liability(for theleasepayments)on thebalancesheet.The
firmgetstoclaimdepreciationeachyearontheassetandalso
deductstheinterestexpensecomponentoftheleasepayment
each year. In general, capital leases recognize expenses
sooner than equivalent operating leases.