IFM9 Ch 19 Show-1-1 - CHAPTER 19 Lease Financing 1 Topics...

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1 CHAPTER 19 Lease Financing
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2 Topics in Chapter Types of leases Tax treatment of leases Effects on financial statements Lessee’s analysis Lessor’s analysis Other issues in lease analysis
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3 Who are the two parties to  a lease transaction? The lessee, who uses the asset and  makes the lease, or rental, payments. The lessor, who owns the asset and  receives the rental payments. Note that the lease decision is a  financing decision for the lessee and an  investment decision for the lessor.
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4 What are the five primary  lease types? Operating lease Short-term and normally cancelable Maintenance usually included Financial lease Long-term and normally noncancelable Maintenance usually not included Sale and leaseback Combination lease "Synthetic" lease
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5 How are leases treated for tax  purposes? Leases are classified by the IRS as  either guideline or nonguideline. For a guideline lease, the entire lease  payment is deductible to the lessee. For a nonguideline lease, only the  imputed interest payment is deductible. Why should the IRS be concerned  about lease provisions?
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6 How does leasing affect a firm’s balance sheet? For accounting purposes, leases are  classified as either capital or operating. Capital leases must be shown directly  on the lessee’s balance sheet. Operating leases, sometimes referred to  as off-balance sheet financing, must be  disclosed in the footnotes. Why are these rules in place?
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7 What impact does leasing have  on a firm’s capital structure? Leasing is a substitute for debt. As such, leasing uses up a firm’s debt  capacity. Assume a firm has a 50/50 target  capital structure.  Half of its assets are  leased.  How should the remaining  assets be financed?
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8 Assume that Lewis Securities plans to acquire some new equipment having a  6-year useful life. If the equipment is leased: Firm could obtain a 4-year lease which  includes maintenance. Lease meets IRS guidelines to expense 
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This note was uploaded on 05/02/2009 for the course FINC 312 taught by Professor Varma during the Spring '08 term at University of Delaware.

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IFM9 Ch 19 Show-1-1 - CHAPTER 19 Lease Financing 1 Topics...

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