Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )

Targethasapretaxcostofdebtof5.50%.To computethe
present value of the commitments, we have to make a
judgmentonthelumpsumcommitmentinyear6.Basedon
theaverageannualleasecommitmentoverthefirstfiveyears
($128.80 million), we arrive at an annuity of 18 years:
5

Thepresentvaluesofthecommitmentsareestimatedinthe
following table, using Target’s pretax cost of debt:

Year

Present ($

millions)

Commitment Value ($

millions)

1 146.00 138.39

2 142.00 127.58

3 137.00 116.67

4 117.00 94.44

5 102.00 78.04

6–23 133.61 1,149.69

Debt value of

leases

1,704.82

The present value of operating leases is treated as the
equivalentofdebtandisaddedontotheconventionaldebtof
the firm. Target has conventional interest-bearing debt of
$9,538billiononitsbalancesheet.Thecumulateddebtfor
the firm is: