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

(Hop HipldF0AV) #1

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

Free download pdf