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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