EFN412 Lecture 04 - EFN412 Advanced Click to edit Master...

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Click to edit Master subtitle style 9/15/10 EFN412 Advanced Part A Topic 4 (4) Debt Finance 2 Required Reading: PBEHP 10th ed. Ch.15 Alternative Reading: PBEHP 9th ed. Ch.16 Background Reading: RTCWJ 4th ed. Ch.23, 3rd ed. Ch. 24 11
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9/15/10 Reading and Assumed Reading PBEHP 10th ed. Ch. 15 PBEHP 9th ed. Ch. 16 Background Reading in RTCJW 4th ed. Ch. 23 or 3rd ed Ch.24 Read notes in Tutorial Documents. Note: For examination purposes we 22
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9/15/10 Learning Objectives On completing this topic students should be able to know: Definitions Nature of Leases (another form of debt) Types of leases Accounting and Tax Treatment of Leases Setting Lease Premiums Evaluation of Lease v Borrow to Buy (Economic Treatment) APV (adjusted present value) Commercial Hire Purchase 33
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9/15/10 Leasing Leasing is a very popular method of financing, as an alternative to the outright purchase of assets (from $6.3 billion in 2004 and $29.4 billion in 2005/06). In this lecture, we make an economic evaluation of whether an asset should be leased, or purchased using 44
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9/15/10 Types of Leases Operating Lease Finance Lease Sale and Lease-Back Leveraged Lease Cross-Border Leasing 55
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9/15/10 Classification of Leases for Operating or Financial leases under AASB 117 Operating Lease essentially a rental agreement - can be cancelled by the lessee at short notice and at low cost. [expensed] Finance Lease 66
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9/15/10 The Lease Agreement The lease agreement will normally set out: (1) the term of the lease. (2) the amount of the lease payments [LP] (3) timing of the LPs (monthly/ yearly, in arrears/advance). (4) any residual [R] payments on expiry of lease. (5) possibly the interest rate implicit in the lease payments. (6) special terms and conditions (who pays maintenance). 77
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9/15/10 Setting Lease Premiums Lessors are in Business Too The lessor will take into account the value of the leased asset and set lease payments so that the lessor's required rate of return is earned (maximize value of the firm) Time Value of Money We use financial mathematics to calculate. The timing of lease payments can be either at 88
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9/15/10 Setting Lease Payments - In Arrears Example An asset worth $200,000 [C] is to be leased over 4 years. Annual payments are due in arrears and a residual payment of $20,000 [R] is due at the end of the lease term. The lessor's interest rate ( iL ) is 15%. What will the 99 LP LP LP LP + $20000 0 1 2 3 4 The sign of the cash flows depends on whether you are looking at the lessor or the lessee.
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9/15/10 Lease Payments - In Arrears continued For the lessor, the lease means an investment of $200,000. The LPs represent the cash inflows from the investment. LPs must be set to earn a 15% return
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EFN412 Lecture 04 - EFN412 Advanced Click to edit Master...

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