7. New Leasing - 1 Click to edit Master subtitle style...

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Unformatted text preview: 1 Click to edit Master subtitle style School of Business Administration University of Miami Leasing Corporate Financial Management 22 Assigned Readings & Problems  Reading: EFS Chapter 21  Homework: EFS Chapter 21 Questions/Challenging Questions: ALL Problems: A2, A4, A5, A7, B1, B2, B4, B8-B14, C1, C2 33 Objectives  In this lecture you will learn: What a lease is in general What the three types of financial leases are What the principle reasons are that firms choose to lease rather than buy How to calculate the Net Advantage of Leasing (NAL) as compared to buying How the possibility of leasing affects the capital budgeting analysis 44 Overview  A lease is a contractual agreement between a lessee and lessor A contract between two parties: the lessee (the user) and the lessor (the owner) The lessee first decides on the asset needed and then negotiates a lease contract with the lessor The lessee has the right to use the asset and in return she must make periodic payments to the lessor  The principal lessors are Equipment Manufacturers (GMAC), Commercial Banks, Finance Companies, and Leasing Companies  From the lessees standpoint, long-term leasing is similar to buying the equipment with a secured loan The terms of the lease are comparable to what a banker might arrange with a secured loan 55  The principal benefit of long-term leasing is tax reduction Leasing allows the transfer of tax benefits from those who need equipmentbut cannot take full advantage of the tax benefits associated with ownershipto a party who can If corporate taxes were ever repealed, long-term leasing would likely disappear! 66 Types of Leases (Leasing Industry)  Operating Leases The term of the operating lease is usually significantly less than the economic life of the asset Usually require the lessor to maintain and insure the leased asset (a full-service lease) Lessee has the option to cancel the lease prior to contract expiration In the past, the lessee received an operator along with the equipment Not necessarily the same as operating leases in accounting! 77  Financial Leases In general, the lessee may not cancel the lease. She must make all payments or face the risk of bankruptcy The lessee is responsible for maintenance or service (a net lease) Lessee has the right to renew the lease on expiration Really an alternative method of financing a purchase! 88 Types of Financial Leases  In a Direct Lease , the asset is typically new and the lessor is either an independent lessor or the equipment manufacturer...
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7. New Leasing - 1 Click to edit Master subtitle style...

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