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Lease Financing

Lease-Defined
lease is a contractual arrangement
Using for equipment financing
In exchange of payments

Essential Elements of Leasing

Parties to the contract
Asset according to lessees choice
Lease rentals to compensate the lessor

Types of Leasing
Finance lease and operating lease
Sale and leaseback leasing
Direct leasing
Leveraged leasing

Financial Leasing (1/2)

Lessor purchase the equipment and lease

Title retained by lessor
Lessor transfer the risk and reward

Financial Leasing (2/2)

Non cancelable in lease period
Approached the economic life of asset
Examples: Ships, Aircrafts etc.

Operating Leasing (1/2)

Shorter termed then economic life
Lessor provides service as well as

maintenance
The lease rental is the cost of service

provided

Operating Leasing (2/2)

Cancelable at any time by lessee
Lessor depends on more than 2 lease
Examples: Auto mobiles, computer, office

equip etc.

Sale and Leaseback Leasing

An indirect from of Leasing
Owner sell the equipment to lessor
Lessor then lease is to lessee

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Direct Leasing
consists of three parties
Usually:Supplier_lessor _lessee
Done by bank widely

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Leveraged Leasing( 1/2)

Parties: lessor, lender and lessee
Lessor buy asset by borrowing
Transaction is routed through a trustee

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Leveraged Leasing(2/2)
Trustee look after interest of lessor and lender
Lessor finance at least 20%
Lender finance the remaining 80%

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Capital leases(1/2)
The conditions for capital lease are
Transfer the title to lessee
Purchase asset at bargain Price option
Lease period should not less than 75%
Payments should not less than 90% of fair value

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Capital Lease (2/2)

Capital Lease in Balance Sheet
Assets
Gross fixed assets
Less: Accumulated
depreciation and
amortization
Net fixed assets

Amount
Tk.

Liabilities

100k Current obligations

under capital leases
Noncurrent obligations
under capital leases
20k
---------Tk.
120k
-------------------

Amount
Tk.

24k
28k

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Amortizing the capital lease

Capital lease must be amortized
Liability reduced over the lease period
Amortization and interest treated as

expense

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Lessors Return(1/4 )
The return depends on 3 things
The length of the lease
The periodic lease payments
The residual value assumption

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Lessors Return(2/4 )
Determining lessors return:

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Lessors Return(3/4 )
Problem to determining lessors return:

Z Company will lease a machine that

costs Tk. 140,000 to purchase. The terms
of the lease call for Tk. 6,500 quarterly
payments payable in advance for 6 years.
At the end of 6 years, Z Company will
have a residual value of Tk. 40,000.

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Lessors Return(4/4)
We can solve the problem in the way:

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Lease payment(1/2)
Problem to determining the lease

payment:
The lessor wanted a 12% return, and the
cost of
the asset is Tk. 140,000 and a
residual value of Tk. 40,000 was
expected.

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Lease Payment(2/2)