Lease financing
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Transcript of Lease financing
Lease Financing
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Lease-Definedlease is a contractual arrangement
Using for equipment financing
In exchange of payments
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Essential Elements of Leasing Parties to the contract
Asset according to lessee’s choice
Lease rentals to compensate the lessor
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Types of LeasingFinance lease and operating lease
Sale and leaseback leasing
Direct leasing
Leveraged leasing
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Financial Leasing (1/2)Lessor purchase the equipment and lease
Title retained by lessor
Lessor transfer the risk and reward
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Financial Leasing (2/2) Non cancelable in lease period
Approached the economic life of asset
Examples: Ships, Aircrafts etc.
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Operating Leasing (1/2)
Shorter termed then economic life
Lessor provides service as well as maintenance
The lease rental is the cost of service provided
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Operating Leasing (2/2)Cancelable at any time by lessee
Lessor depends on more than 2 lease
Examples: Auto mobiles, computer, office equip etc.
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Sale and Leaseback Leasing An indirect from of Leasing
Owner sell the equipment to lessor
Lessor then lease is to lessee
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Direct Leasing consists of three parties
Usually:Supplier_lessor _lessee
Done by bank widely
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Leveraged Leasing( 1/2)Parties: lessor, lender and lessee
Lessor buy asset by borrowing
Transaction is routed through a trustee
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Leveraged Leasing(2/2)Trustee look after interest of lessor and
lender
Lessor finance at least 20%
Lender finance the remaining 80%
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Capital leases(1/2)
The conditions for capital lease areTransfer the title to lessee
Purchase asset at bargain Price option
Lease period should not less than 75%
Payments should not less than 90% of fair value
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Capital Lease (2/2)
Capital Lease in Balance SheetAssets AmountTk. Liabilities AmountTk
.
Gross fixed assetsLess: Accumulated depreciation and amortization
Net fixed assets
100k
20k---------- Tk. 120k --------------------
Current obligations under capital leasesNoncurrent obligations under capital leases
24k
28k
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Amortizing the capital lease Capital lease must be amortized
Liability reduced over the lease period
Amortization and interest treated as expense
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Lessor’s Return(1/4 )
The return depends on 3 thingsThe length of the lease
The periodic lease payments
The residual value assumption
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Lessor’s Return(2/4 )Determining lessor’s return:
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Lessor’s Return(3/4 )Problem to determining lessor’s return: Z Company will lease a machine that costs Tk.
140,000 to purchase. The terms of the lease call for Tk. 6,500 quarterly payments payable in advance for 6 years. At the end of 6 years, Z Company will have a residual value of Tk. 40,000.
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Lessor’s Return(4/4)We can solve the problem in the way:
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Lease payment(1/2)Problem to determining the lease payment: The lessor wanted a 12% return, and the cost of
the asset is Tk. 140,000 and a residual value of Tk. 40,000 was expected.
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Lease Payment(2/2)
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