Lease

Question 1

Valid arguments for leasing:

Answer 1

• Tax differences
• Reduce Resale cost
• Efficiency gain from Specialization
• Reduced distress cost and increased debt capacity
• Transferring risk
• Improved incentives

Question 2

why is valid to lease for tax differences ?

Answer 2

• It is valid if the differences in the speed of CCA deductions of the lessor (higher tax bracket) and the lesses.
• The differences in tax rates is advantages for both

Question 3

why is valid to lease to reduced resale cost?

Answer 3

• It is valid when the assets is going to be use in the short term and to avoid the work of buying , selling, etc.

Question 4

why is valid to lease for efficiency gains from specialization ?

Answer 4

• It is valid when a lessors have efficiency advantages over the lesses.

Ex: when a company can maintain better the equipment than you with less money

Question 5

why is valid to lease to reduced distress cost and increased debt capacity?

Answer 5

• It is valid when a company can not afford to buy or direct lease because of risk of default.

Question 6

why is valid to lease to transfer the risk?

Answer 6

• It is valid when the residual value is uncertain (you don’t know if the machine will be useful depend of demand for the product).

Question 7

why is valid to lease to improved incentive?

Answer 7

• when the lessor is the manufacture of the machine, it takes the risk of residual value. By doing that improve incentives and lower agency cost.

and if the lesser is a monopoly, it give incentives not to overproduce with your machine (and reducing residual value)

Question 8

Suspect arguments for leasing:

Answer 8

• Avoiding Capital Expenditure controls
• Preserving capital
• Reducing leverage through off balance sheet financing

Question 9

why avoiding capital control is a suspect argument ?

Answer 9

• To avoid control and scrutiny of the superiors for expending such amount of money in a machine (or similar)

Question 10

why preserving capital is a suspect argument ?

Answer 10

• It provide 100% finance - basically if you don’t have the money just lease however it may cost more at the end.

Such as paying for iPhone monthly instead all in one

Question 11

why is a suspect argument to reduced leverage through off balance ?

Answer 11

• Lease are liabilities (that may not appears in the balance sheet) and allow the manipulation of the numbers
• by doing that it can increase leverage without increasing the DEBT-Equity Radio.

they have the same risk as owing to many machine but it doesn’t appear in paper.

Question 12

what is sales- type lease ?

Answer 12

• A lease in which the lessor is the manufacture or a primary dealer of the assets

Question 13

what is a direct lease?

Answer 13

• A lease on which the lessor is a specializes company that only purchasing and leasing.

Question 14

what is sale and leaseback ?

Answer 14

• A lease on which the lessee received cash from the sale of the assets and then make lease payments to retain the assets.

Question 15

what is leveraged lease?

Answer 15

• A lease on which the lessor borrows from the bank (or other) to obtain the initial capital to purchase an assets
• using the lease payment to pay for the interest and principal of the loan

buy it then the lease pay the machine

Question 16

What is synthetic lease ?

Answer 16

• A lease that is design to obtain specific accounting and tax treatment.

Question 17

what is fair market value lease (FMV)?

Answer 17

• A lease that give the lessee the option to buy the assets rented

Question 18

what is operating lease ?

Answer 18

• A lease that is viewed as a RENTAL for accounting purpose

- it report the lease payment as as operating expense

Question 19

what is finance lease ?

Answer 19

• A lease that transfer substantially all the risk and rewards of ownership of the assets

it is viewed as an ACQUISITION for accounting purposes

• it is listed on the else’s balance sheet

Question 20

what is a true lease ?

Answer 20

• a lease in which in bankruptcy the lessor retains ownership rights over the assets

Question 21

what is true tax lease ?

Answer 21

• A lease in which the lessor receives the depreciations deductions that come with the ownership of the assets

operating expense

Question 22

what is lease- equivalent loan?

Answer 22

• the loan that is required on the purchase assets

both have the same obligations