Ch.24 erm loans and leases ISE S】 o 2002. Prentice Hall. Inc
Ch. 24: Term Loans and Leases © 2002, Prentice Hall, Inc
Term loans Characteristics of Term Loans Secured loans 1-to 10-year maturity Repaid in periodic installments
Term Loans Characteristics of Term Loans • Secured loans • 1- to 10-year maturity • Repaid in periodic installments
Term loans Collateral for shorter loans Chattel mortgage(mortgage on machinery and equipment) Collateral for longer loans mortgages on real estate
Term Loans Collateral for shorter loans • Chattel mortgage (mortgage on machinery and equipment) Collateral for longer loans • mortgages on real estate
Term loans Restrictive covenants on borrowers Working capital borrower may be required to set a minimum current ratio Restrictions on additional borrowing Borrower provides periodic financial statements。 Restrictions on management changes
Term Loans Restrictive Covenants on Borrowers • Working capital - borrower may be required to set a minimum current ratio. • Restrictions on additional borrowing. • Borrower provides periodic financial statements. • Restrictions on management changes
Term loans Eurodollar loans Loans by major international banks based on foreign deposits denominated in dollars Adjustable interest rates based on the london interbank Offered Rate liBor)
Term Loans Eurodollar Loans • Loans by major international banks based on foreign deposits denominated in dollars. • Adjustable interest rates based on the London Interbank Offered Rate (LIBOR)
Leases essee Acquires the services of a leased asset, by making a series of payments to the owner of the asset Lessor The owner of the asset that is being leased to the lessee
Leases Lessee • Acquires the services of a leased asset, by making a series of payments to the owner of the asset. Lessor • The owner of the asset that is being leased to the lessee
Leasing Types ofleases Direct Lease- a firm acquires the services of an asset that it didnt previously own. Sale and leaseback-asset's owner sells the asset to a buyer, and then leases the asset from the buyer. Leveraged Lease- Lessor borrows from a lender to buy the asset that will be leased to the lessee
Leasing Types of Leases • Direct Lease - a firm acquires the services of an asset that it didn’t previously own. • Sale and Leaseback - Asset’s owner sells the asset to a buyer, and then leases the asset from the buyer. • Leveraged Lease - Lessor borrows from a lender to buy the asset that will be leased to the lessee
Lease vs purchase Issue: Should a firm Purchase an asset using the firms optional financing mix, or Finance the asset using a financial lease
Lease vs. Purchase Issue: Should a firm • Purchase an asset using the firm’s optional financing mix, or • Finance the asset using a financial lease
Lease vs purchase Procedure 1)Compute NPV to determine if the asset should be purchased
Lease vs. Purchase Procedure: 1) Compute NPV to determine if the asset should be purchased
Lease vs purchase Procedure 1)Compute NPV to determine if the asset should be purchased. NPV ∑ ACFt IO (1+k) t=1
Lease vs. Purchase Procedure: 1) Compute NPV to determine if the asset should be purchased. NPV = - IO ACFt (1 + k) t n t=1 S