at
the fair market value of the property. The lessee’s discountrate is the lower of the lessee’s incremental borrowing rate
(the rate the lessee would have to borrow at to be able
to buy the asset) or the lessor’s implicit interest rate.
The lessor’s implicit interest rate is the one implicit...
. Total tractive from the perspective tation may involve the ecoof society in general is not Figure 1: Energy use in U.S. commercial buildings. nomic and legal systems. considered so by the ﬁrm. Regardless of their process, Inherent in choosing a discountrate is the subjective deci- decision makers...
be considered as a new agreement over its term.
Change in estimates or changes in circumstances do not give rise to a new classification of a lease!
Circumstances whereby same lease will be classified differently by lessor & lessee
1) Different interest rates used to discount the MLP
2) Residual...
leaseversus a borrow-buydecision.
A. Lease Information.
a) Terms of lease (how many months or years).
b) Payment schedule (how much and when).
c) Your (Lessee) marginal tax rate.
d) Interest rate you would be charged on a loan.
B. Loan Information.
a) Total...
required rate of return at 12%, investors would be willing to buy the bond only if it is sold at a discountfrom par value.
Thus: If k > coupon rate the bond will sell at a discount.
If k < coupon rate the bond will sell at a premium.
If k = coupon rate the bond will sell at par value.
i. Zero...
financial data, finding an appropriate discountrate, and forecasting financial variables and cash flows. Corporate Finance course is strongly suggested as a prerequisite. Consult with faculty if this can be waived.
Course Materials Textbooks: 1. Principles of Corporate Finance by R.A. Brearly, S...
invaluable in making decisions about buying of leasing equipment based on financial criteria. The calculations for evaluating capital projects discussed in this paper are utilized in such a comparison. The leaseversusbuydecision is based on a comparison between the net present value of the buy...
alternatives?
680 • Part 5
Tactical Financing Decisions
19-2 LeaseversusBuy
Assume that Reynolds’s tax rate is 40 percent and the equipment’s depreciation would be $100 per year. If the company leased the asset on a 2-year lease, the payment would be $110 at the beginning of each year. If...
discountrate to be used in
calculating the present value of the minimum lease payments is the interest rate implicit in the lease, if this is practicable to determine; if not, the lessee’s incremental borrowing rate is used.
l Any initial direct costs of the lessee
are added to the amount...
reliability makes it more complicated to switch from historical cost to fair value accounting.
1. With regard to current market prices historic cost is irrelevant but fair value accounting is more relevant and reliable for the valuation of assets for which there is an active market such as level 1...
guarantee may exist if there were incentives for Lessee to protect Lessor and there were no substantive barriers impeding the following: • CEO’s decision-making ability vis-à-vis Lessor in the setting of leaserates between Lessor and Lessee • CEO’s ability to require Lessee to make payments to Lessor...
and profit and the relevance of cash flow to capital [k] investment appraisal Identify and evaluate relevant cash flows for individual investment decisions. Explain and illustrate the net present value (NPV) and internal rate of return (IRR) methods of discounted cash flow Calculate present value...
-1990’s through to today. This "assumption" that real estate would maintain its value in almost all circumstances provided a comfort level to lenders that offset the risk associated with lending in the sub-prime market. Home prices appeared to be growing at annualized rates of 5-10% from the mid-90s...
conventional, the difference is the term of interest rate and profit rate. The conventional would use interest rate while Islamic financing would use profit rate. The profit rate is derived through a buy-and-sell contract which following the quoted verse from the Holy Qur’an (al-Baqarah, 2:275) that...
evaluating a leaseversusbuydecision is the firm’s aftertax borrowing cost, an NPV analysis is straightforward. We simply discount the cash flows back to the present at Tasha’s aftertax borrowing rate of 5 percent as follows: NPV $10,000 $87.68 2,330 (1 1/1.055)/.05
NET ADVANTAGE TO LEASING...
over
the period from the date of issuance to
the first put date and callable debt can be
amortized either over the contractual or
expected life as a policy decision.
The effective interest rate used for calculating amortization under the effective
interest method discounts estimated cash
flows...
for evaluating a leaseversusbuydecision is the __________. Answer Rationale: Using the pretax cost of issuing debt would not take into account the tax savings of the debt. The cost of issuing new common stock and the lessor's cost of debt are not directly relevant to the lessee's decision in this...
lease or buy is not obvious. The decision rule should be clear in concept, however: If you
need an asset for your business, buy it if the equivalent annual cost of ownership and operation is
less than the best leaserate you can get from an outsider. In other words, buy if you can “rent to
yourself...
flow?
21.6 NPV ANALYSIS OF THE LEASE-VERSUS-BUYDECISION
The detour leads to a simple method for evaluatingleases: discount all cash flows at the after-tax interest rate. From the bottom line of Table 21.3, Xomox’s incremental cash flows
from leasing versus purchasing are
Year 0
Net cash...
Allen, Bernardo and Welch (2000)).
4
Finally, Miller and Upton (1976) show that firms are indifferent between leasing and buying capital, except when they face different tax rates. Meyers, Dill and Bautista (1976) develop a formula to evaluate the leaseversusbuydecision, where different tax...