Corporate Finance: Instructor\'s Manual Applied Corporate Finance

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.