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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