Finance

Chapter I 9 l,ease Financing 797 been asked to analyze the lease-versus-purchase decision and, in the process, to answer the following questions. Who are the two parties to a lease transaction? What are the five primary types of leases, and what are their characteristics? How are leases classified for tax purposes? What effect does leasing have on a firm's balance sheet? What effect does leasing have on a firm's capital structure? What is the present value cost of owning the equipment? (Hint: Set up a time line that shows the net cash flows over the period t = 0 to t = 4, and then find the PV of these net cash flows, or the PV cost of owning.) Explain the rationale for the discount rate you used to find the PV. @H:H;.*s's present value cost of leasing the equipment? {Hint:Again, construct a d. What is the net advantage to leasing (NALX Does vour analysis indicate that Lewis should buy or lease the equipment? Explain. e. Now assume that the equipment's residual value could be as low as $0 or as high as $400,000, but $200,000 is the expected value. Because the residual value is riskier than the other relevant cash flows, this diflerential risk should be incorporated into the analysis. Describe how this could be accomplished. (No calculations are necessary, but explain how you would modifl, the analysis if calculations were required.) What effect would the residual value's increased uncertaintv have on Le"vis's lease-versus- ^ purchase decision? filfnrlessee compares the cost of owning the equipment with the cost of leasing it. Now [-/ p"t yourself in the lessor's shoes. In a few sentences, how should you analyze the decision to write or not to write the lease? @i;) (3) (4) (s) $,t (2) $280,000 per year, that Consolidated Leasing is also in the 407o tax bracket, and &at it also forecasts a residual value. Also, to furnish the maintenance support, Consoli would have to purchase a maintenance contract &om the manufac Consoli ing can obtain an expected 1 return on investments of leasing under t risk. What would be itions? ated's NPV and IRR of (2) What do you &ink 's NPV be if the lease payrnent were set at $260,000 per year? (Hint: the lessee's cash flows.) 'cash flows would be a "mirror image" of h. Lewis's management has moving to a new downtown location, and they are concerned that plans may to fruition prior to the equipment lease's expiration. If occurs then would buv or lease an entirelv new set of equipment, t would like to a cancellation clause in the lease contract. effect would such a clause have riskiness of the lease from nt? From the lessor's standpoint? If you were the lessor, would you ylhan$ng any of the other lease terms if a cancellation clause were added? the cancellation clause contain provisions similar to call premiums or any ive covenants and/or penalties of the type contained in bond indentures? n yolrr answer Lewis's insist o at the same $20,000 annual cost,