Hello again Dave,
brettdj said:
Nate, I think we are generally in agreement....
A lease is a financing decision which is separate to the investing decision.
{snip}
Hmmm, okay we agree here... But we're coming to two different conclusions...
A lease is a financing vehicle for making an investment, it could very well be a purchase or an alternative investement, etc...
brettdj said:
When evaluating a contract or lease, the cost of debt is the appropriate discount rate (taking into account risk, termination clauses etc) to determine whether entering into the contract is the correct decision
{snip}
Negative, and here's why: You're still investing in a vehicle for the purpose of generating return on capital (otherwise you wouldn't do it!) and the cfs associated with completing your end of agreement come from equity and debt financing; hence, I would use the WACC, not a debt rate, which, in all liklihood, understates the relevent cost of capital.
Why is the risk of return on capital reduced on a lease from the investors standpoint? The answer: It isn't. Same operational risk as ordinary operational investments which should be reviewed by applying the WACC, yes-no? Yes.
Triple negative re: contractual agreements. M&A often involves contracts (who buys a company without a contract?!), for example, and here again, time to use the WACC. The decision to involve lawyers and execute tort law is likely to have an impact on your cash flows, but not your discount rate. Contracts don't necessarily speak to risk, contractual obligations are not lived up to on a daily basis!
FYI, your link is somewhat dated, pooling of interests died in the U.S. in the 20th century:
http://www.aicpa.org/pubs/jofa/jul1999/financial_accounting.htm
And the commentary on Purchase Accounting is no longer accurate.
I've bought a few companies in my day and I don't fully agree with that [drastically] oversimplified overview... I surely would not use a debt rate! That's just not right at a conceptual level...
In any case, Happy New Year.