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http://hdl.handle.net/2451/26937
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| Title: | Research and Development Expenses: Implications for Profitability
Measurement and Valuation |
| Authors: | Damodaran, Aswath |
| Issue Date: | 1999 |
| Series/Report no.: | FIN-99-024 |
| Abstract: | Most valuation models begin with a measure of accounting earnings to
arrive at cash flow estimates. When using accounting earnings, we
implicitly assume that the income is obtained by netting out only those
expenses that are operating expenses, i.e., expenses designed to
generate revenues in the current period. Expenses that are intended to
provide benefits over multiple periods are assumed to be considered as
capital expenditures, and these expenses are depreciated or amortized
over multiple periods. In addition, when computing profitability
measures such as return on equity and capital, we stick with this
assumption that operating income measures income generated by assets in
place. In this paper, we examine the accounting treatment of research
and development expenses, and the effects of the treatment on operating
income, capital and profitability. We argue that research and
development expenses should be treated as tax-deductible capital
expenditures, for purposes of valuation, and this can have significant
effects on operating income, capital and expected growth measures for
firms with substantial research expenses. |
| URI: | http://hdl.handle.net/2451/26937 |
| Appears in Collections: | Finance Working Papers
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