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Corporate debt, corporate taxes and leasing
Author(s) -
Bayless Mark E.,
Diltz J. David
Publication year - 1990
Publication title -
managerial and decision economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.288
H-Index - 51
eISSN - 1099-1468
pISSN - 0143-6570
DOI - 10.1002/mde.4090110103
Subject(s) - lease , capital structure , equity (law) , cost of capital , business , debt , finance , weighted average cost of capital , capital budgeting , economics , monetary economics , microeconomics , profit (economics) , financial capital , capital formation , political science , law
This paper utilizes recent developments in capital lease modeling to develop a new specification of the relationship between the expected returns to debt, levered equity and unlevered equity for firms that lease a portion of their assets. Accounting explicitly for leases is shown to be important when the difference between equity and debt risk is large, when the risk of leased assets differs from the firm's other assets and when salvage value is a significant portion of the capitalized value of the firm's lease obligations. This new specification yields improved estimates of firms' unlevered cost of capital, thereby facilitating improved capital budgeting decisions in those that lease a significant portion of their assets.