Banking Chapter 25 Leasing Outline The Following Outline Correlated The Powerpoint Lecture

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Chapter 25

Leasing

I. Chapter Outline

The following chapter outline is correlated to the PowerPoint Lecture Slides. The PowerPoint slides

are referenced in bold. Alternative Examples to selected textbook examples are also available in the

PowerPoint Lecture Slides and are also referenced in bold.

25.1 The Basics of Leasing (Slides 6–7)

• Examples of Lease Transactions (Slides 8–11)

• Lease Payments and Residual Values (Slides 12–15)

• Example 25.1 Lease Terms in a Perfect Market (Slides 16–17)

• PowerPoint Alternative Example 25.1 (Slides 18–20)

• Leases Versus Loans (Slides 21–28)

• Example 25.2 Loan Payments in a Perfect Market (Slides 23–24)

• Other Lease Provisions (Slides 39–40)

25.2 Accounting, Tax, and Legal Consequences of Leasing (Slide 41)

• Lease Accounting (Slides 41–47)

25.3 The Leasing Decision (Slide 57)

• Cash Flows for a True Tax Lease (Slides 57–59)

• Table 25.1 Cash Flow ($) Consequences from Leasing Versus Buying (Slide 60)

• Lease Versus Buy (An Unfair Comparison) (Slides 61–66)

• Lease Versus Borrow (The Right Comparison) (Slides 67–78)

– The Lease-Equivalent Loan (Slides 67–76)

• Table 25.2 Incremental Free Cash Flows of Leasing Versus Buying (Slide 69)

• Table 25.3 Cash Flows from Buying and Borrowing Using the Lease-Equivalent Loan

(Slide 74)

25.4 Reasons for Leasing (Slide 88)

• Valid Arguments for Leasing (Slide 90)

– Tax Differences (Slide 90)

– Reduced Resale Costs (Slide 90)

– Efficiency Gains from Specialization (Slide 90)

– Reduced Distress Costs and Increased Debt Capacity (Slide 90)

– Mitigating Debt Overhang (Slide 90)

– Transferring Risk (Slide 90)

– Improved Incentives (Slide 90)

• Interview with Mark Long

• Example 25.8 Exploiting Tax Differences Through Leasing (Slides 91–92)

II. Learning Objectives

25-2 Distinguish between a sales-type lease, a direct lease, and a sale and leaseback.

25-4 Define the four types of options available for the lessee to obtain ownership of the asset at the

end of the lease.

25-6 Distinguish between the two broad categories of leases recognized by the IRS.

25-8 Given necessary inputs, compare the cost of leasing with the cost of financing.

25-10 Identify suspect reasons for leasing.

III. Chapter Overview

25.1 The Basics of Leasing

This section defines the parties to the lease, along with various types of lease transactions. Example

25.1 shows how to calculate lease terms in a perfect market. The bottom line is that “in a perfect

Berk/DeMarzo • Corporate Finance, Fourth Edition, Global Edition 107

market, the cost of leasing and then purchasing the asset is equivalent to the cost of borrowing to

purchase the asset.” Example 25.2 shows how to calculate a loan payment for the lease presented in

25.2 Accounting, Tax, and Legal Consequences of Leasing

For accounting purposes, there are two types of lease: operating leases and capital leases. An

operating lease is viewed as a rental—the entire lease payment is an operating expense, and no

depreciation is incurred. A capital lease is viewed as an acquisition. The interest portion of the lease

payment is deducted, and the asset is depreciated. Example 25.4 shows the effect of the lease versus

25.3 The Leasing Decision

This section shows how a firm makes the leasing decision in a world where markets are not perfect. It

25.4 Reasons for Leasing

Leasing can be profitable for lessor and lessee for many reasons. This section analyzes those reasons

to evaluate their validity. Valid reasons are tax differences, reduced resale costs, efficiency gains from

108 Berk/DeMarzo • Corporate Finance, Fourth Edition, Global Edition

specialization, reduced distress costs and increased debt capacity, transferring risk, and improved

incentives. Example 25.8 shows how tax differences can be exploited through leasing. Reasons that

people often give that are suspect include avoiding capital expenditure controls, preserving capital,

and reducing leverage through off-balance-sheet financing.

IV. Spreadsheet Solutions in Excel

The following Problems for Chapter 25 have spreadsheet versions of the problems available: 4, 8, and

10. These spreadsheets can be downloaded from the Instructor’s Resource Center at: