公司理财（英文版·第5版）课件 第25章 租赁

CorporateFinanceFifthEditionChapter25LeasingCopyright©2020,2017,2014PearsonEducation,Inc.

AllRightsReservedChapterOutline25.1TheBasicsofLeasing25.2Accounting,Tax,andLegalConsequencesofLeasing25.3TheLeasingDecision25.4ReasonsforLeasingLearningObjectives(1of3)Definealeaseandspecifytherightsandobligationsofeachpartytothelease.Distinguishbetweenasales-typelease,adirectlease,andasaleandlease-back.Computethecostofleasinginaperfectmarket.Definethefourtypesofoptionsavailableforthelesseetoobtainownershipoftheassetattheendofthelease.LearningObjectives(2of3)DistinguishbetweenthetwotypesofleasesrecognizedbyF

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B.DistinguishbetweenthetwobroadcategoriesofleasesrecognizedbytheI

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S.Describethetreatmentofleasesinbankruptcy.LearningObjectives(3of3)Givennecessaryinputs,comparethecostofleasingwiththecostoffinancing.Identifygoodreasonsforleasing,includingforanon-taxlease.Identifysuspectreasonsforleasing.25.1TheBasicsofLeasing(1of2)LesseeThepartyinaleaseliableforperiodicpaymentsinexchangefortherighttousetheassetLessorThepartyinaleasewhoisentitledtotheleasepaymentsinexchangeforlendingtheasset25.1TheBasicsofLeasing(2of2)Mostleasesinvolvelittleornoupfrontpayment.Thelesseecommitstomakeregularleasepaymentsforthetermofthecontract.Attheendofthecontractterm,theleasespecifieswhowillretainownershipoftheassetandatwhatterms.ExamplesofLeaseTransactions(1of4)Sales-TypeLeaseAtypeofleaseinwhichthelessoristhemanufacturer(orprimarydealer)oftheassetDirectLeaseAtypeofleaseinwhichthelessorisnotthemanufacturerbutisoftenanindependentcompanythatspecializesinpurchasingassetsandleasingthemtocustomersExamplesofLeaseTransactions(2of4)SaleandLease-BackDescribesatypeofleaseinwhichafirmalreadyownsanassetitwouldprefertoleaseThefirmreceivescashfromthesaleoftheassetandthenmakesleasepaymentstoretaintheuseoftheasset.ExamplesofLeaseTransactions(3of4)LeveragedLeasesAleaseinwhichthelessorborrowsfromabankorotherlendertoobtaintheinitialcapitaltopurchaseanasset,usingtheleasepaymentstopayinterestandprincipalontheloanExamplesofLeaseTransactions(4of4)Special-PurposeEntity(S

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E)AseparatebusinesspartnershipcreatedbyalesseeforthesolepurposeofobtainingaleaseSyntheticLeaseAleasecommonlyusesaS

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EandisdesignedtoobtainspecificaccountingandtaxtreatmentsLeasePaymentsandResidualValues

(1of4)ResidualValueAnasset’smarketvalueattheendofaleaseThecostofaleasewilldependontheasset’sresidualvalue.LeasePaymentsandResidualValues

(2of4)Assumeyourbusinessneedsanew$20,000forkliftandyouareconsideringleasingtheforkliftforfouryears.Theestimatedresidualvalueoftheforkliftinfouryearsis$6000.LeasePaymentsandResidualValues

(3of4)IfleasepaymentsofamountLaremademonthly,thenthelessor’scashflowsfromthetransactionareasfollows:Notethatleasepaymentsaretypicallymadeatthebeginningofeachpaymentperiod.LeasePaymentsandResidualValues

(4of4)Inaperfectmarket,thecostofleasingisequivalenttothecostofpurchasingandresellingtheasset.TextbookExample25.1(1of3)LeaseTermsinaPerfectMarketProblemSupposethepurchasepriceoftheforkliftis$20,000,itsresidualvalueinfouryearsiscertaintobe$6000,andthereisnoriskthatthelesseewilldefaultonthelease.Iftherisk-freeinterestrateisa6%A

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Rwithmonthlycompounding,whatwouldbethemonthlyleasepaymentforafour-yearleaseinaperfectcapitalmarket?TextbookExample25.1(2of3)SolutionBecauseallcashflowsareriskfree,wecandiscountthemusingtherisk-freeinterestrateofpermonth.FromEq.25.1,WhatmonthlyleasepaymentLhasthispresentvalue?Wecaninterprettheleasepaymentsasanannuity.Becausethefirstleasepaymentstartstoday,wecanviewtheleaseasaninitialpaymentofLplusa47-monthannuityofL.Thus,usingtheannuityformula,weneedtofindLsothatTextbookExample25.1(3of3)SolvingforL,wegetAlternativeExample25.1(1of3)ProblemAssumeThepurchasepriceofanindustriallatheis$50,000.Itsresidualvalueinfiveyearswillbe(withcertainty)$10,000.Thereisnoriskthatthelesseewilldefaultonthelease.Iftherisk-freeinterestrateisa4.8%A

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Rwithmonthlycompounding,whatwouldbethemonthlyleasepaymentforafive-yearleaseinaperfectcapitalmarket?AlternativeExample25.1(2of3)SolutionP

V(LeasePayments):PutthecalculatoronB

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Gmode:Putthecalculatoron12periodsperyear:AlternativeExample25.1(3of3)Solution(continued)ThemonthlypaymentisLeasesVersusLoans(1of3)Asanalternative,youcouldobtainafour-yearloanforthepurchasepriceandbuytheforkliftoutright.IfMisthemonthlypaymentforafullyamortizingloan,thelender’scashflowswillbeasfollows:LeasesVersusLoans(2of3)Iftheloanisfairlypriced,theloanpaymentswouldbesuchthatWithastandardloan,theentirecostoftheassetisfinanced.Withalease,onlythecostoftheeconomicdepreciationoftheassetduringthetermoftheleaseisfinanced.Thiscausestheloanpaymentstobehigherthantheleasepayments.TextbookExample25.2(1of2)LoanPaymentsinaPerfectMarketProblemSupposethatyoupurchasetheforkliftfor$20,000byborrowingthepurchasepriceusingafouryearannuityloan.Whatwouldthemonthlyloanpaymentbeinaperfectcapitalmarketwheretherisk-freeinterestrateisa6%A

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Rwithmonthlycompounding,assumingnoriskofdefault?HowdoesthiscomparewiththeleasepaymentofExample25.1?TextbookExample25.2(2of2)SolutionBecauseallcashflowsareriskfree,wecandiscountthemusingtherisk-freeinterestrateofBecauseloanpaymentsaremadeattheendofeachmonth,usingtheannuityformulatovaluetheloanpayments,Eq.25.2becomesSolvingforMgivestheloanpayments:Ofcourse,whiletheleasepaymentsarelower,withthelease,wehavetheuseoftheforkliftforfouryearsonly.Withtheloan,weowntheforkliftforitsentirelife.AlternativeExample25.2(1of3)ProblemExtendingAlternativeExample25.1,assumethefollowing:Thelathecanbefinancedwitha$50,000five-yearloan.Whatwouldthemonthlyloanpaymentbeinaperfectcapitalmarketwheretherisk-freeinterestrateisa4.8%A

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Rwithmonthlycompounding,assumingnoriskofdefault?AlternativeExample25.2(2of3)SolutionMakesurethecalculatorisonENDmode:Putthecalculatoron12periodsperyear:AlternativeExample25.2(3of3)SolutionThemonthlypaymentisLeasesVersusLoans(3of3)BytheLawofOnePrice,inaperfectmarket,thecostofleasingandthenpurchasingtheassetisequivalenttothecostofborrowingtopurchasetheasset.End-of-TermLeaseOptions(1of4)FairMarketValue(F

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V)LeaseAtypeofleasethatgivesthelesseetheoptiontopurchasetheassetatitsfairmarketvalueattheterminationoftheleaseWithperfectcapitalmarkets,thereisnodifferencebetweenanF

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Vleaseandaleaseinwhichtheassetsareretainedbythelessor.End-of-TermLeaseOptions(2of4)$1outLeaseAtypeofleaseinwhichownershipoftheassettransferstothelesseeattheendoftheleaseforanominalcostof$1.Becausethelesseehaseffectivelypurchasedtheassetbymakingtheleasepayments,thistypeofleaseisinmanywaysequivalenttofinancingtheassetwithastandardloan.AlsoknownasFinanceLeaseEnd-of-TermLeaseOptions(3of4)FixedPriceLeaseAtypeofleaseinwhichthelesseehastheoptiontopurchasetheassetattheendoftheleaseforafixedpricethatissetupfrontintheleasecontract.Thistypeofleaseisverycommonforconsumerleases.Becausethelesseehasanoptiontopurchase,thelessorwillsetahigherleaseratetocompensateforthevalueofthisoption.End-of-TermLeaseOptions(4of4)FairMarketValueCapLeaseAtypeofleaseinwhichthelesseecanpurchasetheassetattheminimumofitsfairmarketvalueandafixedpriceor“cap”.Similartoafixedpricelease,althoughtheoptioniseasiertoexercisebecausethelesseedoesnothavetofindasimilarassetelsewheretobuywhenthefixedpriceexceedsthemarketvalue.TextbookExample25.3(1of3)LeasePaymentsandEnd-of-LeaseOptionsProblemComputetheleasepaymentsfortheforkliftleaseofExample25.1iftheleaseis(a)afairmarketvaluelease,(b)a$1.00outlease,or(c)afixedpriceleasethatallowsthelesseetobuytheassetattheendoftheleasefor$4000.TextbookExample25.3(2of3)SolutionWiththeF

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Vlease,thelesseecanbuytheforkliftforitsfairmarketvalueof$6000attheendofthelease.Thelessorobtainsaresidualvalueof$6000,eitherfromtheforkliftitselforfromthepaymentfromthelessee.Thus,theleasepaymentswillbeunchangedfromExample25.1,or$357permonth.Withthe$1.00outlease,thelessorreceivesessentiallynoresidualvalue.Thus,theleasepaymentsthemselveswillhavetocompensatethelessorforthefull$20,000purchaseprice.TheleasepaymentsarethereforeThesepaymentsareslightlylessthantheloanpaymentsof$470permonthcalculatedinExample25.2becausetheleasepaymentsoccuratthebeginning—ratherthantheend—ofthemonth.TextbookExample25.3(3of3)Withthefixedpricelease,becausetheforkliftwillbeworth$6000forcertain,thelesseewillexercisetheoptiontopurchaseitfor$4000.Asaresult,thelessorwillreceiveonly$4000attheendofthelease.FortheleasetohaveanN

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Vofzero,thepresentvalueoftheleasepaymentsmustbeTherefore,theleasepaymentwillbeThispaymentexceedsthatoftheF

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Vleaseduetothelessee’sabilitytobuytheassetatadiscountattheendofthelease.AlternativeExample25.3(1of3)ProblemAssumeThepurchasepriceofanindustriallatheis$50,000.Itsresidualvalueinfiveyearswillbe(withcertainty)$10,000.Thereisnoriskthatthelesseewilldefaultonthelease.Iftherisk-freeinterestrateisa4.8%A

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Rwithmonthlycompounding,whatwouldbethemonthlyleasepaymentforafive-yearleaseiftheleaseisa$1outlease?AlternativeExample25.3(2of3)SolutionPutthecalculatoronBEGmode:Putthecalculatoron12periodsperyear:AlternativeExample25.3(3of3)SolutionThemonthlypaymentisOtherLeaseProvisions(1of2)LeasesmayhavemanyotherprovisionsProvisionsthatgivevaluableoptionstothelesseeraisetheamountoftheleasepayments,whileprovisionsthatrestricttheseoptionswilllowerthemOtherLeaseProvisions(2of2)ExamplesofotherleaseprovisionsEarlycancellationoptionsthatallowthelesseetoendtheleaseearly(perhapsforafee).Buyoutoptionsthatallowthelesseetopurchasetheassetbeforetheendoftheleaseterm.Clausesmayallowthelesseetotradeinandupgradetheequipmenttoanewermodelatcertainpointsinthelease.25.2Accounting,Tax,andLegalConsequencesofLeasing(1of5)LeaseAccountingForlessees,theFinancialAccountingStandardsBoard(F

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B),distinguishestwotypesofleasesbasedontheleaseterms,andthisclassificationdeterminesthelease’saccountingtreatment.25.2Accounting,Tax,andLegalConsequencesofLeasing(2of5)LeaseAccountingOperatingLeaseAtypeoflease,viewedasarentalforaccountingpurposes,inwhichthelesseereportstheentireleasepaymentasanoperatingexpenseThelesseedoesnotdeductadepreciationexpensefortheassetanddoesnotreporttheassetortheleasepaymentliabilityonitsbalancesheet.Operatingleasesaredisclosedinthefootnotesofthelessee’sfinancialstatements.25.2Accounting,Tax,andLegalConsequencesofLeasing(3of5)LeaseAccountingCapitalLease(akaFinanceLease)Long-termleasecontractthatobligatesafirmtomakeregularleasepaymentsinexchangefortheuseofanasset.Viewedasanacquisitionforaccountingpurposes;thelesseeliststheassetonitsbalancesheetandincursdepreciationexpenses.Thelesseealsoliststhepresentvalueofthefutureleasepaymentsasaliabilityanddeductstheinterestportionoftheleasepaymentsasaninterestexpense.TextbookExample25.4(1of3)LeasingandtheBalanceSheetProblemHarbordCruiseLinescurrentlyhasthefollowingbalancesheet(inmillionsofdollars):AssetsBlankLiabilitiesblankCash100Debt900Property,Plant,andEquipment1500Equity700TotalAssets1600TotalDebtplusEquity1600Harbordisabouttoaddanewfleetofcruiseships.Thepriceofthefleetis$400million.WhatwillHarbord’sbalancesheetlooklikeif(a)itpurchasesthefleetbyborrowingthe$400million,(b)itacquiresthefleetthrougha$400millioncapitallease,or(c)itacquiresthefleetthroughanoperatinglease?TextbookExample25.4(2of3)SolutionForparts(a)and(b),thebalancesheetconsequencesarethesame:Thefleetbecomesanewassetofthefirm,andthe$400millionbecomesanadditionalliability.AssetsBlankLiabilitiesBlankCash100Debt1300Property,Plant,andEquipment1900Equity700TotalAssets2000TotalDebtplusEquity2000Notethatthefirm’sdebt-equityratioincreasesinthiscaseTextbookExample25.4(3of3)Ifthefleetisacquiredthroughanoperatinglease,asdescribedinpart(c),thereisnochangeintheoriginalbalancesheet:Thefleetisnotlistedasanasset,andtheleaseisnotviewedasaliability.Thus,theapparentleverageratioisunchanged.25.2Accounting,Tax,andLegalConsequencesofLeasing(4of5)LeaseAccountingAleaseistreatedasacapitalleaseforthelesseeandmustbelistedonthefirm’sbalancesheetifitsatisfiesanyofthefollowingconditionsTitletothepropertytransferstothelesseeattheendoftheleaseterm.Theleasecontainsanoptiontopurchasetheassetatabargainpricethatissubstantiallylessthanitsfairmarketvalue.25.2Accounting,Tax,andLegalConsequencesofLeasing(5of5)LeaseAccountingTheleasetermis75%ormoreoftheestimatedeconomiclifeoftheasset.Thepresentvalueoftheminimumleasepaymentsatthestartoftheleaseis90%ormoreoftheasset’sfairmarketvalue.TextbookExample25.5(1of3)OperatingVersusCapitalLeasesProblemConsideraseven-yearfairmarketvalueleasefora$12.5millionGulfstreamJetwitharemainingusefullifeof10years.Supposethemonthlyleasepaymentsare$175,000andtheappropriatediscountrateisa6%A

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Rwithmonthlycompounding.Wouldthisleasebeclassifiedasanoperatingleaseoracapitalleaseforthelessee?Whatiftheleasecontractgavethelesseetheoptiontocancelthecontractafterfiveyears?TextbookExample25.5(2of3)SolutionWecomputethepresentvalueofthemonthlyleasepaymentsatthebeginningoftheleaseusingtheannuityformulawithamonthlyinterestrateofmonthlypaymentsaftertheinitialpayment.Thus,Becausethepresentvalueoftheleasepaymentsisofthevalueofthejet,theleasesatisfiescondition4andsoitisacapitallease.Ifthelesseecancancelthecontractafterfiveyears,thentheminimumnumberofleasepaymentsis60underthecontract.Inthiscase,TextbookExample25.5(3of3)This,isonlyofthevalueofthejet.Asnootherconditionsconditionsforacapitalleasearesatisfied,theleasewouldbeclassifiedasanoperatinglease.TheTaxTreatmentofLeases(1of4)TheI

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Shasitsownclassificationrulesthatdeterminethetaxtreatmentofalease.TrueTaxLeaseAtypeofleaseinwhichthelessorreceivesthedepreciationdeductionassociatedwiththeownershipoftheasset.Thelesseecandeductthefullamountoftheleasepaymentsasanoperatingexpenseandtheleasepaymentsaretreatedasrevenueforthelessor.TheTaxTreatmentofLeases(2of4)TheI

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Shasitsownclassificationrulesthatdeterminethetaxtreatmentofalease.Non-TaxLeaseAtypeofleaseinwhichthelesseereceivesthedepreciationdeductionsfortaxpurposesandcanalsodeducttheinterestportionoftheleasepaymentsasaninterestexpense.Theinterestportionoftheleasepaymentisinterestincometothelessor.TheTaxTreatmentofLeases(3of4)Iftheleasesatisfiesanyoftheseconditions,itistreatedasanon-taxlease:Thelesseeobtainsequityintheleasedasset.Thelesseereceivesownershipoftheassetoncompletionofallleasepayments.Thetotalamountthatthelesseeisrequiredtopayforarelativelyshortperiodofuseconstitutesaninordinatelylargeproportionofthetotalvalueoftheasset.TheTaxTreatmentofLeases(4of4)Theleasepaymentsgreatlyexceedthecurrentfairrentalvalueoftheasset.Thepropertymaybeacquiredatabargainpriceinrelationtothefairmarketvalueoftheassetatthetimewhentheoptionmaybeexercised.Someportionoftheleasepaymentsisspecificallydesignatedasinterestoritsequivalent.LeasesandBankruptcy(1of3)Thetreatmentofleasedpropertyinbankruptcywilldependonwhethertheleaseisclassifiedasasecurityinterestoratrueleasebythebankruptcyjudge.LeasesandBankruptcy(2of3)SecurityInterestAclassificationofaleaseinbankruptcyproceedingsthatassumesafirmhaseffectiveownershipofanassetandtheassetisprotectedagainstseizure.Thelessoristreatedasanyothersecuredcreditorandmustawaitthefirm’sreorganizationorultimateliquidation.LeasesandBankruptcy(3of3)TrueLeaseAclassificationofaleaseinbankruptcyproceedingsinwhichthelessorretainsownershiprightsoveranasset.Within120daysoffilingChapter11,thebankruptfirmmustchoosewhethertoassumeorrejectthelease.Ifitassumesthelease,itmustsettleallpendingclaimsandcontinuetomakeallpromisedleasepayments.Ifitrejectsthelease,theassetmustbereturnedtothelessor.25.3TheLeasingDecision(1of3)CashFlowsforaTrueTaxLeaseAssumeEmoryPrintingneedsaprintingpress.Itcanpurchaseonefor$50,000incash.Themachinewilllastfiveyears,anditwillbedepreciatedfortaxpurposesusingstraight-linedepreciationoverthatperiod.Emorycandeduct$10,000peryearfordepreciation.Emory’staxrateis25%.Thus,Emorywillsave$2500peryearintaxesfromthedepreciationdeduction.25.3TheLeasingDecision(2of3)CashFlowsforaTrueTaxLeaseAsanalternative,Emorycanleasethemachineinsteadofpurchasingit.Afive-yearleasecontractwillcost$12,000peryear.Emorymustmakethesepaymentsatthebeginningofeachyear.Becausetheleaseisatruetaxlease,Emorydeductstheleasepaymentsasanoperatingexpensewhentheyarepaid.Theafter-taxcostofeachleasepaymentis:

25.3TheLeasingDecision(3of3)CashFlowsforaTrueTaxLeaseAsshownonthefollowingslide,thecashflowsofleasingdifferfrombuying.Apurchaserequiresalargeinitialoutlayfollowedbyaseriesofdepreciationtaxcredits.Thecostofaleasedmachineismoreevenlyspreadovertime.Note:Itisalsoassumedthatthemachinehasnoresidualvalueafterfiveyearsifitispurchased.Table25.1CashFlow($)ConsequencesfromLeasingVersusBuyingLeaseVersusBuy(AnUnfairComparison)(1of6)Todecideifitistoleaseorbuy,thepresentvalueofthecashflowsineachtransactionmustbecomputed.Theriskoftheleasepaymentsisnogreaterthantheriskofsecureddebt,soitisreasonabletodiscounttheleasepaymentsatthefirm’ssecuredborrowingrate.LeaseVersusBuy(AnUnfairComparison)(2of6)AssumingEmory’sborrowingrateis8%,thecostofbuyingthemachinehasapresentvalueofLeaseVersusBuy(AnUnfairComparison)(3of6)ThecostofleasingthemachinehasapresentvalueofLeasingischeaperthanbuying,withanetsavingsofLeaseVersusBuy(AnUnfairComparison)(4of6)Theprecedinganalysisignoresanimportantpoint.Whenafirmentersintoalease,itiscommittingtoleasepaymentsthatareafixedfutureobligationofthefirmthateffectivelyaddsleveragetoitscapitalstructure.LeaseVersusBuy(AnUnfairComparison)(5of6)Becauseleasingisaformoffinancing,itshouldbecomparedtootherfinancingoptions.Forexample,ratherthanbuytheassetoutright,Emorycouldborrowfundstofinancethepurchaseofthemachine,thusmatchingtheleverageofthelease.IfEmorydoesborrow,itwillalsobenefitfromtheinteresttaxshieldprovidedbytheadditionalleverage.LeaseVersusBuy(AnUnfairComparison)(6of6)Tocorrectlyevaluatealease,itshouldbecomparedtopurchasingtheassetusinganequivalentamountofleverage.Theappropriatecomparisonisnotleaseversusbuy,butratherleaseversusborrow.LeaseVersusBorrow(TheRightComparison)(1of10)TheLease-EquivalentLoanLease-EquivalentLoanAloanthatisrequiredforthepurchaseofanassetthatleavesthepurchaserwiththesamenetfutureobligationsasaleasewouldentail.LeaseVersusBorrow(TheRightComparison)(2of10)TheLease-EquivalentLoanIntheEmoryexample,tocomputethelease-equivalentloan,thedifferencebetweenthecashflowsfromleasingversusbuyingmustfirstbecomputed(asshownonthefollowingslide).Relativetobuying,leasingsavescashupfrontbutresultsinlowerfuturecashflows.Table25.2IncrementalFreeCashFlowsofLeasingVersusBuyingLeaseVersusBorrow(TheRightComparison)(3of10)TheLease-EquivalentLoanTheinitialbalanceonthelease-equivalentloanisthepresentvalueoftheincrementalcashflowsdiscountedattheafter-taxcostofdebtLeaseVersusBorrow(TheRightComparison)(4of10)TheLease-EquivalentLoanInthiscase,byleasingratherthanbuying,Emorygivesupthedepreciationtaxshieldandcommitstomakingtheleasepayments,foratotaladditionalliabilityof$11,500ineachofthenextfouryearsand$2500inyearfive.Emory’safter-taxcostofdebtis

Sotheinitiallease-equivalentloanbalanceshouldbeLeaseVersusBorrow(TheRightComparison)(5of10)TheLease-EquivalentLoanInsteadofleasing,Emorycouldinsteadbuytheprintingpressandborrow$41,717.Bybuyingandborrowingusingthelease-equivalentloan,Emorysavesanadditionalattimeperiod0.Leasingthemachineisunattractiverelativetothisalternative.LeaseVersusBorrow(TheRightComparison)(6of10)TheLease-EquivalentLoanAsshownonthefollowingslide,thesameresultcanbeobtainedbycomputingthecashflowsthatresultfrombuyingthemachineandborrowingusingthelease-equivalentloan.Table25.3CashFlowsfromBuyingandBorrowingUsingtheLease-EquivalentLoanLeaseVersusBorrow(TheRightComparison)(7of10)TheLease-EquivalentLoanComparingthecashflowsfrombuyingtheprintingpressandfinancingitwiththelease-equivalentloanwiththecashflowsofthelease,Emoryhasanetfutureobligationof$9000peryearforfouryearsinbothcases.LeaseVersusBorrow(TheRightComparison)(8of10)TheLease-EquivalentLoanWhiletheleverageisthesameforthetwostrategies,theinitialcashflowisnot.Withthelease,Emorywillpay$9000initially.Withtheloan,EmorywillpaythepurchasepriceoftheprintingpressminustheamountborrowedorAgain,borrowingtobuythemachineischeaperthantheleasewithasavingsofLeaseVersusBorrow(TheRightComparison)(9of10)ADirectMethodLeasingcanbecomparedtobuyingtheassetusingequivalentleveragebydiscountingtheincrementalcashflowsofleasingversusbuyingusingtheafter-taxborrowingrate.LeaseVersusBorrow(TheRightComparison)(10of10)TheEffectiveAfter-TaxLeaseBorrowingRateLeasingandbuyingcanbecomparedintermsofaneffectiveafter-taxborrowingrateassociatedwiththelease.ThisisgivenbytheI

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Roftheincrementalleasecashflows.InEmory’scase,theI

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Ris6.73%.Thisoptionisnotattractivecomparedtotheafter-taxrateofthatEmorypaysonitsdebt.EvaluatingaTrueTaxLease(1of2)Insummary,whenevaluatingatrue-taxlease,comparetheleasingtoapurchasethatisfinancedwithequivalentleverage.First,computetheincrementalcashflowsforleasingversusbuying,includingthedepreciationtaxshield(ifbuying)andthetaxdeductibilityoftheleasepaymentsifleasing.ThencomputetheN

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Vofleasingversusbuyingusingequivalentleveragebydiscountingtheincrementalcashflowsattheafter-taxborrowingrate.EvaluatingaTrueTaxLease(2of2)IftheN

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Visnegative,thenleasingisunattractivecomparedtotraditionaldebtfinancing.IftheN

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Vispositive,thenleasingdoesprovideanadvantageovertraditionaldebtfinancingandshouldbeconsidered.TextbookExample25.6(1of3)EvaluatingNewLeaseTermsProblemSupposeEmoryrejectstheleaseweanalyzed,andthelessoragreestolowertheleaserateto$11,700peryear.Doesthischangemaketheleaseattractive?TextbookExample25.6(2of3)SolutionTheincrementalcashflowsareshowninthefollowingtable:TextbookExample25.6(3of3)UsingEmory’safter-taxborrowingcostof6%,thegainfromleasingversusanequivalentlyleveragedpurchaseisTherefore,theleaseisattractiveatthenewterms.AlternativeExample25.6(1of2)ProblemAssume:Yourfirmisconsideringpurchasingorleasinganewdeliverytruck.Thepurchasepriceofthetruckis$75,000.Ifyouleasethetruck,annualpaymentswillbe$17,000,withthefirstoffourpaymentsduetoday.Ifthefirm’safter-taxborrowingcostis6.2%,shouldthefirmbuyorleasethetruck?blankYear01134FreeCashFlowsblankblankblankblankblankblankBuyblank($75,000)$5,250$5,250$5,250$5,250Leaseblank($17,000)($17,000)($17,000)($17,000)blankAlternativeExample25.6(2of2)SolutionTheN

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VoftheBuyFreeCashFlowsat6.2%is:TheN

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VoftheLeaseFreeCashFlowsat6.2%is:BuyinggivesalowercostonanN

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Vbasis.EvaluatingaNon-TaxLease(1of3)Evaluatinganon-taxleaseismuchmorestraightforwardthanevaluatingatruetaxlease.Thelesseestillreceivesthedepreciationdeductions;