Chapter 21 - Leasing

Chapter 21 - Leasing - o Residual risk is borne by lessor o...

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Chapter 21 Leasing 21.1 Types of leases The basics o Lease – contractual agreement between a lessee (user) and the lessor ( owner ) o Establishes that the lessee has the right to use the asset and in return must make periodic payments to the lessor o Direct leases – lessor is an independent company who purchases the equipment o Sales-type leasing – leasing of own products 21.8 Does leasing ever pay: the base case o As long as both parties are subject to the same interest and tax rate and transaction costs are ignored → no leasing deal that benefits both parties (NPV of zero) 21.9 Reasons for leasing o Good reasons for leasing o Tax advantages o Should a user be in a lower tax bracket →receive little benefit form depreciation and interest deductions o Savings passed on by the lessor o Reduction of uncertainty o Since lessee does not own the property → do not care about residual value
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Unformatted text preview: o Residual risk is borne by lessor o Especially new/small companies want to cut down risk →large firms are capable of bearing the risk o Transaction costs o Costs of changing ownership are generally greater than the costs of writing a lease agreement o But also generates agency costs →overuse the asset (monitoring) o Bad reasons for leasing o Leasing and accounting income o Boosts ROA as in the first year dep +interest >lease payments ++ and less assets o One-hundred-percent financing o Leases do not permit a greater level of total liabilities o Other reasons o Leasing may be used to circumvent capital-expenditure control systems o Firm and asset characteristics are important in the lease-or-buy decision o The more sensitive the value of the asset is to use and maintenance →buy o Price discrimination →may be a way to circumvent laws...
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