Exam 20: Leases and Retirement Obligations

Although a company's ROIC will change following the adjustment for operating leases,its valuation should not change.

Using the present value of reported rental expenses systematically undervalues the asset,since it ignores the residual value returned at the end of the lease contract.

An analyst's appropriate adjustments for operating leases would be to increase assets,increase liabilities,and increase operating income.

Analysts in the investment banking industry multiply rental expenses by 8 times to approximate asset value.Although based on reasonable assumptions,the method is very simple and can both overvalue and undervalue the leased assets.

Many companies securitized their accounts receivable before the financial crisis of 2008;however,after the financial crisis,this practice largely stopped.

When a firm uses operating leases,an analyst should determine the firm's equity value by subtracting traditional debt and the value of operating leases from enterprise value.

Summarize how to adjust the weighted average cost of capital (WACC )for the existence of operating leases,and comment on the likely effect on the WACC.

In their study of operating leases,Lim,Mann,and Mihov found that use of more operating leases led to agencies assigning companies lower credit ratings.These ratings and the use of operating leases led to higher required yields on new public bond issuances.

Over- or underfunded pension status must be incorporated into value as a nonoperating asset or as a debt equivalent.

Only expected returns (and not actual returns )on pension investments flow through the income statement,and the rate of expected returns is selected at the discretion of company management.