WST: 4.2 Investment Banking Training - Valuation TEV & Exclusion of Leases

Wall St. Training Self-Study Instructor, Hamilton Lin, CFA digs into a common mistake by finance and valuation professionals -- the inclusion of capital leases as a form of debt. While certain industries (airlines and real estate) are the exceptions, by and large, when valuing companies, one should not include capital leases as debt in Total Enterprise Valuation.

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[wstss]

in such cases, one must use "Adjusted TEV" (traditional TEV + capital AND operating leases) and EBITDAR (R = rent) for multiples & valuation comparison. In both cases (the capital & operating leases in numerator AND rent in denominator) must be "COGS" related. For instance, in airlines, only use "aircraft rent" not all rent such as office space rent. take our private company valuation course - we go into full detail!

[wstss]

@juliusreea, correct - in our full blown Corporate Valuation course, we spell out exceptions, such as "buy-vs-lease" industries, including airlines, certain retailers, etc. In our Deal Comps class we use the example of Mervyn's, a retailer that was purchased for its real estate (like Lambert with Sears/Kmart). Mervyn's ended up shutting after selling all its real estate. As such, it is important to consider industries or businesses with buy-vs-lease decisions in the full valuation context.

[juliusreea]

on the other hand if lets say we have retail company which leases all their about 100 retail stores, excluding capital leases, in my opinion, will distort enterprise value?