Just wondering why you need to adjust operating lease while valuing firm by using residual income method. The value of the firm is only affected by: Book value, earning, and dividend (Ending B = Beginning B + E - D). By adjusting operation lease, you add both asset and liability in balance sheet, but there is no impact on either one of these three elements thus there is no impact on firm value. Also, non-consolidated SPE falls into the same category. Thanks for any help!
earnings are affected… depreciation expense, interest expense on the income statement do increase because the operating lease becomes a capital lease. That has the effect of changing earnings… (addition): previous rental expense gets removed as well. As a result the statements of financials are more representative. Additionally one of the reasons for doing the backout and re-doing the above manner is to make multiple companies in the industry more comparable. When you compare stocks and are making a decision to buy / sell - the fact that the financials are more “apples-to-apples” is crucial.
Another thing to note is that adding to both Assets & Liabilities boosts the firm’s leverage. This should boost the Cost of Equity you use to discount the firm’s cash flows (esp. if you are using industry avg unlevered betas as a starting point)