Hostname: page-component-848d4c4894-nr4z6 Total loading time: 0 Render date: 2024-05-31T15:30:12.436Z Has data issue: false hasContentIssue false
  • English
  • Français

Difference Equation Solutions to the Valuation of Lease Contracts

Published online by Cambridge University Press:  01 December 2009

Anthony Steele
Get access Rights & Permissions [Opens in a new window]

Extract

In recent articles, Myers, Dill, and Bautista [15] (MDB) and Franks and Hodges [7] (FH) provide valuable contributions to the leasing literature. MDB derive a simple formula for lease valuation in a Modigliani-Miller world with corporate taxes. The paper by FH presents a simpler derivation of the same formula. FH also extend MDB's analysis to consider the empirically significant case of a lessee company currently in a non-tax-paying position, but which expects to resume paying taxes at some (specified) future date. The work of FH is important here in laying bare the economics of leasing. Temporary non-tax-paying lessees joining tax-paying lessors in non-zero-sum contracts; however, their paper leaves the problem as a programming application. This paper explores the difference equations underlying the MDB-FH approach for finding the adjusted present value of the lease contract. It is found that the order of the system of difference equations depends on the treatment of taxation complexities. Also described is a simple procedure for solving these higher-order difference equations to find the appropriate adjusted discount rates to use in MDB's lease valuation formula, extending its application to these more complex tax situations. The paper is set out in six sections.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 19 , Issue 3 , September 1984 , pp. 311 - 328
Copyright
Copyright © School of Business Administration, University of Washington 1984

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

[1]Ashton, D. J. “The Reasons for Leasing—A Mathematical Programming Framework.” Journal of Business Finance and Accounting, Vol. 5 (Summer 1978). pp. 233–251.CrossRefGoogle Scholar
[2]Bower, R. S. “Issues in Lease Financing.” Financial Management. Vol. 2 (Winter 1973), pp. 25–34.CrossRefGoogle Scholar
[3]Brealey, R. A., and Young, C. M.. “Debt, Taxes and Leasing—A Note.” Journal of Finance, Vol. 35 (December 1980), pp. 1245–1250.Google Scholar
[4]Chiang, A. C.Fundamental Methods of Mathematical Economics, 2nd edition. New York: McGraw-Hill (1974).Google Scholar
[5]Fawthrop, R. A., and Terry, B.. “The Evaluation of an Integrated Investment and Lease Financing Decision.” Journal of Business Finance and Accounting. Vol. 3 (Autumn 1976). pp. 79–111.CrossRefGoogle Scholar
[6]Fawthrop, R. A. “The Evaluation of an Integrated Investment and Lease Financing Decision: A Reply.” Journal of Business Finance and Accounting, Vol. 6 (Spring 1979), pp. 89–93.CrossRefGoogle Scholar
[7]Franks, J. R., and Hodges, S. D.. “Valuation of Financial Lease Contracts: A Note.” The Journal of Finance, Vol. 33 (May 1978), pp. 657–669.CrossRefGoogle Scholar
[8]Franks, J. R. “The Role of Leasing in Capital Investment.” National Westminster Bank Quarterly Review, (August 1979). pp. 20–31.Google Scholar
[9]Hull, J. C., and Hubbard, G. L.. “Lease Evaluation in the UK: Current Theory and Practice.” Journal of Business Finance and Accounting, Vol. 7 (Winter 1980). pp. 619–638.CrossRefGoogle Scholar
[10]Lewellen, W. G., and Emery, D. R.. “On the Matter of Parity among Financial Obligations.” The Journal of Finance, Vol. 36 (March 1981). pp. 97–111.CrossRefGoogle Scholar
[11]Ma, R. “Comparative Analysis of Lease Evaluation Models: A Review Article.” Accounting and Business Research, Vol. 11 (Spring 1981), pp. 153–162.CrossRefGoogle Scholar
[12]Miller, M. H., and Modigliani, F.. “Dividend Policy, Growth, and the Valuation of Shares.” Journal of Business, Vol. 34 (October 1961), pp. 411–433.CrossRefGoogle Scholar
[13]Modigliani, F., and Miller, M. H.. “Corporate Income Taxes and the Cost of Capital: A Correction.” The American Economic Review, Vol. 53 (June 1963), pp. 433–443.Google Scholar
[14]Myers, S. C. “Interactions of Corporate Financing and Investment Decisions: Implications for Capital Budgeting.” The Journal of Finance. Vol. 29 (March 1974). pp. 1–25.Google Scholar
[15]Myers, S. C.; Dill, D. A.; and Bautista, A. J.. “Valuation of Financial Lease Contracts.” The Journal of Finance. Vol. 31 (June 1976), pp. 799–819.CrossRefGoogle Scholar
[16]Steele, A. “The Evaluation and Negotiation of Finance Leases.” Accounting and Finance Working Paper No. 7, Lancaster University (1981).Google Scholar
[17]Young, C. M. “The Valuation of Lease Contracts: An Analysis of the Lease or Buy Decision.” Unpub. Ph.D. Dissertation. Lancaster University (1982).Google Scholar