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

YearOperating Lease Commitment

1 146

2 142

3 137

4 117

5 102

UsingTarget’spretaxcostofdebtof5.5%(basedon
its synthetic rating of A–and therisk-free rate of
4.5%)asthediscountrate,wecomputedthepresent
valueofoperatingleasecommitments(inmillionsof
dollars):

Year CommitmentPresent Value

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

Thecumulative commitmentforyear 6 andbeyond
of $2,405 million was converted into an 18-year
annuity of $133,61 million a year, based on the
average lease commitment for thenext fiveyears.
The operating income was adjusted to reflect
operatingleases(usingtheapproximationdeveloped
in Chapter 3).