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8 when a firm becomes bankrupt or is reorganized the

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Unformatted text preview: a firm becomes bankrupt or is reorganized, the maximum claim of lessors against the corporation is 3 years of lease payments, and the lessor of course gets the asset back. If debt is used to purchase an asset, the creditors have a claim that is equal to the total outstanding loan balance. Disadvantages The commonly cited disadvantages of leasing are as follows: 1. A lease does not have a stated interest cost. Thus, in many leases the return to the lessor is quite high, so the firm might be better off borrowing to purchase the asset. CHAPTER 16 Hybrid and Derivative Securities 683 2. At the end of the term of the lease agreement, the salvage value of an asset, if any, is realized by the lessor. If the lessee had purchased the asset, it could have claimed its salvage value. Of course, an expected salvage value when recognized by the lessor results in lower lease payments. 3. Under a lease, the lessee is generally prohibited from making improvements on the leased property or asset without the approval of the lessor. If the proper...
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