Corporate Finance: Instructor\'s Manual Applied Corporate Finance

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Aswath Damodaran 172

Converting Operating Leases to Debt


! The “debt value” of operating leases is the present value of the lease
payments, at a rate that reflects their risk.
! In general, this rate will be close to or equal to the rate at which the company
can borrow.

This allows us to get a more realistic view of the leverage of firms that use


operating leases a lot. Examples would be the retailers like the Gap or Walmart.

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