FIN2101 BUSINESS FINANCE II Module 8 Analysis of leases
FIN2101 BUSINESS FINANCE II Module 8 Analysis of Leases
Student activities Reading Text, Chapter 18(pp. 652-61 onl Text Study Guide, Chapter 18(part only ■ Study B00k, Module8 Tutorial Activities Self assessment activity 8.1 a Text Study guide, Chapter 18, T/F1-2, M/C 1 4. Problem 1
Student Activities Reading ◼ Text, Chapter 18 (pp. 652-61 only) ◼ Text Study Guide, Chapter 18 (part only) ◼ Study Book, Module 8 Tutorial Activities ◼ Self Assessment Activity 8.1 ◼ Text Study Guide, Chapter 18, T/F 1-2, M/C 1- 4, Problem 1
Lease finance providers Lease finance commitments, by type of lessor Source 19992000 2000-2001 2001-2002 Banks $3135m $2062m $1905m Finance companies $2556m $l571m $I812m General financiers $1472m $I580m $1625m Other $744m $849m $1271m Totals $7908m $606lm $6613m Source: ABS. Year book Australia 2003. Table 26.26
Lease Finance Providers Lease finance commitments, by type of lessor Source 1999-2000 2000-2001 2001-2002 Banks $3 135m $2 062m $1 905m Finance companies $2 556m $1 571m $1 812m General financiers $1 472m $1 580m $1 625m Other $ 744m $ 849m $1 271m Totals $7 908m $6 061m $6 613m Source: ABS, Year Book Australia 2003, Table 26.26
assets leased Lease finance commitments, by type of goods leased fasset 1999-20002000-20012001-2002 MV& other transport $3639m$2529m$2844m Construction earth moving equipment $319m$217m$232m Agricultural machinery equipment $328m$212m$220m Automatic data processing equipment $1996m$1944m$2124 office machinery Shop and office furniture, fittings equipment$ 454m$ 343m$ 340m Other goods 1171m$815m$857m Totals $7907m$6060m$6617m Source: ABS. Year book ustralia 2003. Table 26.27
Assets Leased Lease finance commitments, by type of goods leased Type of Asset 1999-2000 2000-2001 2001-2002 MV & other transport $3 639m $2 529m $2 844m Construction & earth moving equipment $ 319m $ 217m $ 232m Agricultural machinery & equipment $ 328m $ 212m $ 220m Automatic data processing equipment & office machinery $1 996m $1 944m $2 124m Shop and office furniture, fittings & equipment $ 454m $ 343m $ 340m Other goods $1 171m $ 815m $ 857m Totals $7 907m $6 060m $6 617m Source: ABS, Year Book Australia 2003, Table 26.27
Definitions LEASE-A contract which grants a lessee the right to use an asset in return for periodic payments to the lessor LESSOR- The owner of the asset LESSEE- The party leasing the asset from its owner
Definitions ◼ LEASE - A contract which grants a lessee the right to use an asset in return for periodic payments to the lessor. ◼ LESSOR - The owner of the asset. ◼ LESSEE - The party leasing the asset from its owner
Lease document ■ Terms of the lease ■ asset to be leased. a Payments-when and how much? Obligations of lessee and lessor -who pays for insurance. maintenance etc Whether lessee may acquire the asset at the end of the lease Cancellation provisions
Lease Document ◼ Terms of the lease. ◼ Asset to be leased. ◼ Payments - when and how much? ◼ Obligations of lessee and lessor - who pays for insurance, maintenance, etc. ◼ Whether lessee may acquire the asset at the end of the lease. ◼ Cancellation provisions
Types of leases Operating lease- short-term (5 ears or less ye The term of the lease is usually less than the economic life of the asset Financial lease- more long-term. The economic life of the asset and the term of the lease are approximately equal a Basic characteristics of each covered in text, pp 652-4
Types of Leases ◼ Operating lease - short-term (5 years or less). The term of the lease is usually less than the economic life of the asset. ◼ Financial lease - more long-term. The economic life of the asset and the term of the lease are approximately equal. ◼ Basic characteristics of each covered in text, pp. 652-4
Operating lease Risks and rewards rest with lessor a Generally cancellable at virtually no cost Sum of lease payments less than the initial cost to the lessor a may have a separate or inclusive maintenance contract whereby the lessor assumes responsibility for maintenance of the asset service or maintenance lease a Equipment reverts back to the lessor when lease is terminated
Operating Lease ◼ Risks and rewards rest with lessor. ◼ Generally cancellable at virtually no cost. ◼ Sum of lease payments less than the initial cost to the lessor. ◼ May have a separate or inclusive maintenance contract whereby the lessor assumes responsibility for maintenance of the asset - service or maintenance lease. ◼ Equipment reverts back to the lessor when lease is terminated
Finance lease a Lessee incurs most of the risks and enjoys most of the benefits a Lessee normally responsible for maintenance etc. Non-cancellable by either party. Sum of lease payments exceeds the value of the leased asset Lessee guarantees the residual value
Finance Lease ◼ Lessee incurs most of the risks and enjoys most of the benefits. ◼ Lessee normally responsible for maintenance, etc. ◼ Non-cancellable by either party. ◼ Sum of lease payments exceeds the value of the leased asset. ◼ Lessee guarantees the residual value
Residual value a An option for the lessee to purchase the asset cannot be explicitly provided for in the lease agreement a However, the lessee indemnifies the lessor for any loss resulting from the sale at the end of the lease term Usually through the lessee purchasing the asset for the original residual value(usually between 10%o and 40 of the original cost
Residual Value ◼ An option for the lessee to purchase the asset cannot be explicitly provided for in the lease agreement. ◼ However, the lessee indemnifies the lessor for any loss resulting from the sale at the end of the lease term. Usually through the lessee purchasing the asset for the original residual value (usually between 10% and 40% of the original cost)