boken kap 17 del 1 Flashcards
What does L stand for?
Lease payment
- What is a lease?
o A contractual agreement between a lessee and a lessor where the lessee has the right to use an asset in exchange for periodic payments to the lessor.
- What are the two main types of leases?
o Operating leases and Financial leases.
- What characterizes an operating lease?
o Not fully amortized, often includes maintenance and insurance by the lessor, and has a cancellation option.
- What are the key features of a financial lease?
o Fully amortized, no maintenance or service provided by the lessor, lessee has the right to renew the lease, and it cannot be cancelled.
- What are the two types of financial leases?
- Sale and leaseback,
- Leveraged lease.
- What happens in a sale and leaseback arrangement?
o The lessee sells an asset and immediately leases it back, receiving cash from the sale and making periodic payments.
- What are the three parties involved in a leveraged lease?
o The lessee, the lessor, and the lenders.
- How are lenders protected in a leveraged lease?
o They have first claim on the asset in case of default and receive lease payments directly if the loan defaults.
- How are operating and financial leases treated in accounting for the lessee?
o They are treated in the same way as normal assets, with depreciation etc.
- What is the lessee’s incremental borrowing rate?
o The pre-tax discount rate.
- What is the lease’s internal rate of return?
o The interest rate implicit in the lease.
- What are the two components of a lease that attract tax benefits to the firm?
o The interest expense and the annual depreciation.
- At what rate should cash flows in the lease vs buy decision be discounted?
o At the after-tax incremental borrowing rate (after-tax cost of debt capital).
