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Leasing

Principles of Corporate Finance

Brealey and Myers Sixth Edition

Slides by

Matthew WillChapter 25

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Topics Covered

What is a Lease?

Why Lease?

Operating Leases

Valuing Financial Leases

When Do Financial Leases Pay?

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ease Ter!s

Operating Leases

Financial Leases Rental Lease

Net lease

Direct lease

Leveraged lease

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Why ease"

Sensible Reasons for Leasing Shortter! leases are convenient

"ancellation options are valuable

#aintenance is provided

Standardi$ation leads to lo% costs

&a' shields can be used

(voiding the alternative !ini!u! ta'

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Why ease"

Dubious Reasons for Leasing Leasing avoids capital e'penditure controls

Leasing preserves capital

Leases !ay be off balance sheet financing

Leasing effects boo) inco!e

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#peratin$ ease

Example

(c!e Li!o has a client %ho %ill sign a lease for *

years+ %ith lease pay!ents due at the start of each

year, &he follo%ing table sho%s the NPV of theli!o if (c!e purchases the ne% li!o for -*.+///

and leases it our for * years,

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#peratin$ ease

Example - cont

(c!e Li!o has a client %ho %ill sign a lease for * years+ %ith lease pay!ents

due at the start of each year, &he follo%ing table sho%s the NPV of the li!o if

(c!e purchases the ne% li!o for -*.+/// and leases it our for * years,

0ear

/ 1 2 3 4 . 5

6nitial cost *.#aintenance+ insurance+ selling+ 12 12 12 12 12 12 12

and ad!inistrative costs

&a' shield on costs 4,2 4,2 4,2 4,2 4,2 4,2 4,2

Depreciation ta' shield / .,2. 7,4 .,/4 3,/2 3,/2 1,.1

&otal 72,7 2,.. /,5 2,*5 4,*7 4,*7 5,28

%P& ' () * + ,-./05

9rea) even rent:level; 25,17 25,17 25,17 25,17 25,17 25,17 25,17

&a' 8,15 8,15 8,15 8,15 8,15 8,15 8,15

9rea) even rent afterta' 1*,/2 1*,/2 1*,/2 1*,/2 1*,/2 1*,/2 1*,/2

%P& ' () * + ,-./05

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Financial eases

Example

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Financial easesExample - cont

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Financial easesExample - cont

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Financial easesExample - cont

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Financial eases

Example - cont

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Financial easesExample - cont

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Financial eases

Example - cont

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Financial easesExample - cont

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Financial eases

Example - cont

&he