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Obtaining Capital: Methods of Long-Term Financing > Leasing
Leasing
• Capital Leases vs. Operating Leases
• Impact of Leasing on the Income Statement
• Advantages of Leasing
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Obtaining Capital: Methods of Long-Term Financing > Leasing
Capital Leases vs. Operating Leases
• The finance company is the legal owner of the asset during duration of the lease.
However the lessee has control over the asset providing them the benefits and
risks of (economic) ownership.
• An operating lease is a lease whose term is short compared to the useful life of
the asset or piece of equipment (an airliner, a ship, etc. ) being leased.
• Unlike a Financial Lease or Finance lease, at the end of the operating lease the
title to the asset does not pass to the lessee, but remains with the lessor.
Lease
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Obtaining Capital: Methods of Long-Term Financing > Leasing
Impact of Leasing on the Income Statement
• Lessees can often benefit from comprehensive maintenance programs offered by
lessors while still paying a discounted premium due to the fact that the asset is
being leased, not purchased.
• The costs of leases on the income statement depend on the duration and type of
lease.
• EBITDA coverage ratio will improve if using operating leases.
• Leasing will influence depreciation expenses, maintenance expenses, other costs
and ratios on income statement.
Leasing impact
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Obtaining Capital: Methods of Long-Term Financing > Leasing
Advantages of Leasing
• Leasing is a process by which a firm can obtain the use of a certain fixed asset for
which it must pay a series of contractual, periodic, tax deductible payments.
• Capital assets may fluctuate in value. Leasing shifts risks to the lessor, but if the
property market has shown steady growth over time, a business that depends on
leased property is sacrificing capital gains.
• Depreciation of capital assets has different tax and financial reporting treatment
from ordinary business expenses.
• Leasing may provide more flexibility to a business which expects to grow or move
in the relatively short term, because a lessee is not usually obliged to renew a
lease at the end of its term.
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Appendix
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Obtaining Capital: Methods of Long-Term Financing
Key terms
• capital-intensive Capital intensity is the term for the amount of fixed or real capital present in relation to other factors of
production, especially labor.
• EBITDA Coverage Times interest earned (TIE) or interest coverage ratio is a measure of a company's ability to honor its debt
payments. It may be calculated as either EBIT or EBITDA divided by the total interest payable.
• present value Present value, also known as present discounted value, is the value on a given date of a payment or series of
payments made at other times.
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Obtaining Capital: Methods of Long-Term Financing
Leasing impact
Leasing will improve the ratios of the income statement.
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Obtaining Capital: Methods of Long-Term Financing
Lease
Leasing is a good way to lower the costs of a company.
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Obtaining Capital: Methods of Long-Term Financing
Which of the following is a characteristic of an operating lease?
A) At the end of the lease, the company has the opportunity to purchase
the asset at its market value.
B) At the end of the lease, the lessee obtains ownership of the asset.
C) The term of the lease is at least 75% of the asset's estimated useful
life.
D) The present value off the lease payments equals or exceeds 90% of
the original cost of the asset.
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Obtaining Capital: Methods of Long-Term Financing
Which of the following is a characteristic of an operating lease?
A) At the end of the lease, the company has the opportunity to purchase
the asset at its market value.
B) At the end of the lease, the lessee obtains ownership of the asset.
C) The term of the lease is at least 75% of the asset's estimated useful
life.
D) The present value off the lease payments equals or exceeds 90% of
the original cost of the asset.
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Obtaining Capital: Methods of Long-Term Financing
Which of the following is NOT an expense that can be decreased
by a company through leasing?
A) Depreciation expense.
B) Interest expense.
C) Maintenance expense.
D) Acquisition costs.
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Obtaining Capital: Methods of Long-Term Financing
Which of the following is NOT an expense that can be decreased
by a company through leasing?
A) Depreciation expense.
B) Interest expense.
C) Maintenance expense.
D) Acquisition costs.
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Obtaining Capital: Methods of Long-Term Financing
Which of the following is an advantage a company can obtain by
leasing its equipment?
A) All of these answers.
B) A business can grow more rapidly by leasing property instead of
purchasing it.
C) Leasing shifts the risk of capital asset value fluctuations from the
lessee to the lessor.
D) Leasing provides flexibility to companies that expect to grow or move
in the short term.
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Obtaining Capital: Methods of Long-Term Financing
Which of the following is an advantage a company can obtain by
leasing its equipment?
A) All of these answers.
B) A business can grow more rapidly by leasing property instead of
purchasing it.
C) Leasing shifts the risk of capital asset value fluctuations from the
lessee to the lessor.
D) Leasing provides flexibility to companies that expect to grow or move
in the short term.
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Obtaining Capital: Methods of Long-Term Financing
Attribution
• Wikipedia. "Finance lease." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Finance_lease
• Wikipedia. "Operating lease." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Operating_lease
• Wikipedia. "Present value." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Present_value
• Wikipedia. "Leasing." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Leasing
• College Cram. "EBITDA Coverage | Finance: Ratios of Debt Management | College-Cram.com." CC BY http://www.collegecram.com/study/finance/ratios-of-debt-management/ebitda-coverage/
• Wikipedia. "EBITDA Coverage." CC BY-SA 3.0 http://en.wikipedia.org/wiki/EBITDA%20Coverage
• Wikipedia. "Leasing." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Leasing
• Wikipedia. "capital-intensive." CC BY-SA 3.0 http://en.wikipedia.org/wiki/capital-intensive
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