IFM10 Ch19 Lecture

IFM10 Ch19 Lecture - CHAPTER 19 Lease Financing 1 Topics in...

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CHAPTER 19 Lease Financing 1
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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 2
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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. 3
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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 4
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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? 5
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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? 6
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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
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IFM10 Ch19 Lecture - CHAPTER 19 Lease Financing 1 Topics in...

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