ToadjusttheoperatingincomeforTarget,wefirstusethefull
adjustment.Tocomputedepreciationontheleasedasset,we
assume straight-line depreciation over the lease life
6 (23years)onthevalueoftheleasedassetwhichisequalto
the debt value of the lease commitments.
Target’sstatedoperatingincomeof$3,601millionisadjusted
for operating leases:
Theapproximateadjustmentisalsoestimated,whereweadd
the imputed interest expense using the pretax cost of debt.
Accounting Earnings and True Earnings
Firmshavebecomeparticularlyadeptatmeetingandbeating
analyst estimates of earnings each quarter. While beating
earningsestimatescanbeviewedasapositivedevelopment,
somefirmsadoptaccountingtechniquesthatarequestionable
toaccomplishthisobjective.Whenvaluingthesefirms, we
have to correct operating income for these accounting
manipulations to arrive at the correct operating income.
The Phenomenon of Managed Earnings
Inthe1990s,firmslikeMicrosoftandIntelsetthepatternfor
technologyfirms.Infact,Microsoftbeatanalystestimatesof