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Click to edit Master title style,Click to edit Master text styles,Second level,Third level,Fourth level,Fifth level,26-,16,McGraw Hill/Irwin,Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved,Leasing,Principles of Corporate Finance,Seventh Edition,Richard A.,Brealey,Stewart C. Myers,Slides by,Matthew Will,Chapter 26,McGraw Hill/Irwin,Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved,Topics Covered,What is a Lease?,Why Lease?,Operating Leases,Valuing Financial Leases,When Do Financial Leases Pay?,Lease Terms,Operating Leases,Financial Leases,Rental Lease,Net lease,Direct lease,Leveraged lease,Why Lease?,Sensible Reasons for Leasing,Short-term leases are convenient,Cancellation options are valuable,Maintenance is provided,Standardization leads to low costs,Tax shields can be used,Avoiding the alternative minimum tax,Why Lease?,Dubious Reasons for Leasing,Leasing avoids capital expenditure controls,Leasing preserves capital,Leases may be off balance sheet financing,Leasing effects book income,Operating Lease,Example,Acme Limo has a client who will sign a lease for for 7 years, with lease payments due at the start of each year. The following table shows the NPV of the limo if Acme purchases the new limo for $75,000 and leases it our for 7 years.,Operating Lease,Example - cont,Acme Limo has a client who will sign a lease for for 7 years, with lease payments due at the start of each year. The following table shows the NPV of the limo if Acme purchases the new limo for $75,000 and leases it our for 7 years.,Financial Leases,Example,Greymare,Bus Lines is considering a lease. Your operating manager wants to buy a new bus for $100,000. The bus has an 8 year life. The Bus Saleswoman says she will lease,Greymare,the bus for 8 years at $16,900 per year, but,Greymare,assumes all operating and maintenance costs.,Should,Greymare,Buy or Lease the bus?,Financial Leases,Example - cont,Greymare,Bus Lines is considering a lease. Your operating manager wants to buy a new bus for $100,000. The bus has an 8 year life. The Bus Saleswoman says she will lease,Greymare,the bus for 8 years at $16,900 per year, but,Greymare,assumes all operating and maintenance costs.,Should,Greymare,Buy or Lease the bus?,Cash flow consequences of the lease contract to,Greymare,Financial Leases,Example - cont,Greymare,Bus Lines is considering a lease. Your operating manager wants to buy a new bus for $100,000. The bus has an 8 year life. The Bus Saleswoman says she will lease,Greymare,the bus for 8 years at $16,900 per year, but,Greymare,assumes all operating and maintenance costs.,Should,Greymare,Buy or Lease the bus?,Cash flow consequences of the lease contract to,Greymare,:,Greymare,saves the $100,000 cost of the bus,Loss of depreciation benefit of owning the bus,$16,900 lease payment is due at the start of each year,Lease payments are tax deductible,Financial Leases,Example - cont,Greymare,Bus Lines Balance Sheet with out lease,Equivalent lease balance sheet,Financial Leases,Example - cont,Greymare,Bus Lines can borrow at 10%, thus the value of the lease should be discounted at 6.5% or .10 x (1-.35). The result will tell us if,Greymare,should lease or buy the bus.,Financial Leases,Example - cont,Greymare,Bus Lines can borrow at 10%, thus the value of the lease should be discounted at 6.5% or .10 x (1-.35). The result will tell us if,Greymare,should lease or buy the bus.,Financial Leases,Example - cont,Greymare,Bus Lines lease cash flows can also be thought of as loan equivalent cash flows.,Financial Leases,Example - cont,Greymare,Bus Lines lease cash flows can also be thought of as loan equivalent cash flows.,Financial Leases,Example - cont,The,Greymare,Bus Lines lease cash flows can also be treated as a favorable financing alternative and valued using APV.,
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