7.leasing company

7/24/2019 7.Leasing Company

1/15

7-1

Chapter 07: LeasingCompanies

A contract between two parties where one partyprovides the right to another party to use an assetwithout being owner for a lump sum or periodic

receipts and that another party agrees to use thatasset in exchange of making lump sum or periodicpayments is called lease. The party presently ownsthe asset and provides the using right to anotherparty is called lessor and the party uses the asset iscalled lessee. The company doing this type ofbusiness i.e. providing asset using right throughcontracts for earning prot is known as leasingcompany.


2/15

7-2

Advantages of leasing

Leasing is less capital-intensive than Purchasing.

apital assets may !uctuate in value and it shifts risksto the lessor.

"ew businesses are formed by using the fund savedfrom leasing solve unemployment problem.

iv. Leasing may provide more !exibility to a businesswhich expects to grow or move in the relatively short

term. v. #n some cases a lease may be the only practical

option$ such as for a small business that wishes tolocate in a large o%ce building within tight locational

parameters.


3/15

7-3

Types of leases1. Operating lease:The short-term andcancelable lease contract where the owner&lessor

assumes all repairs and maintenance expenses iscalled operating lease.

2. Capital or fnancial lease:The long-termand non-cancelable lease contract where the

user&lessee assumes all repairs and maintenanceexpenses is called capital lease. This capitallease is categori'ed into the followings(


4/15

7-4

Types of leases

(a) Direct fnancing lease:The long-term lease agreement whereafter participating the contract the lessor places an order to thesupplier or manufacturer of the asset for making delivery

directly to the lessee is called direct nancing lease.(b) Sale and lease back:The long-term lease agreement where

after selling an asset to the buyer) the seller i.e. previous ownertakes back the asset under lease for using as lessee is calledsale and lease back.

(c) Leveraged lease:The long-term lease agreement where afterparticipating the contract the lessor borrows the decit fundfrom the lender for buying the asset from the supplier ormanufacturer and then delivers the asset to the lessee is calledleveraged lease.


5/15

7-5

Criteria for capital

lease*. The lessee should have bargain purchase option at

the end of the lease period.+. The lessee should have renewal option of the lease.,. The ownership of the leased asset should be

automatically transferred from the lessor to thelessee.

. The present value of all rental payments should be

eual or more than /01 of the market value of theleased asset.2. The lease period should be eual or more than 321

of the asset4s economic life.


6/15

7-6

Rational for leasing*. 5hifting euipment disposal

problem.

+. 5hifting euipment4s obsolescencerisk.

,. Preserving credit capacity.. onserving working capital.

2. 6aintaining liuidity.


7/15

7-7

Rational for leasing7. 8n9oying tax benet on rental

payments.

3. #mproving nancial position of thestatement i.e. balance sheet.

:. Accelerating the acuisition of reuired

asset.

/. ;acilitating the using opportunity of anasset without owning and buying.


8/15

7-

Example

Annual revenue Tk.4000Expected useful life 4 years

Tax rate 40%

If the asset is bought

Purchase price Tk.6000Class life 3 yearsEstimated salvae value is !er"#traiht$line depreciati"n meth"d

ith half$year c"nventi"nAnnul "peratin expenses Tk.&000'e(uired rate "f return is &)%

If the asset is leased

Annual lease payment Tk.)*00Annual "peratin expense Tk.&000+ncremental ,"rr"in rate "fthe less"r is &0%


9/15

7-!

5olution( alculation of "P>under buy alternative

-ear C/T epreciati"n

Taxa,leinc"me

TaxPayment

CAT P1 2&)%

0 $ $ $ $ $6000 $6000

& 3000 &000 )000 *00 ))00 &6

) 3000 )000 &000 400 )600 )05)

3 3000 )000 &000 400 )600 &*&4 3000 &000 )000 *00 ))00 &3

et present value 7P18 &)*5


10/15

7-10

alculation of "P> under

lease alternative(-ear +nitial

savins9"sttax

shield

et9ease

payment

T"talpayment

P1 2 6%

0 ?7000 - - ?7000 7000

* 00 *7:0 +0:0 -*/7+

+ :00 *7:0 +:0 -++03, :00 *7:0 +:0 -+0:+

00 *7:0 +0:0 -*7:

"et present value @"P> -*://


11/15

7-11

Becision

5ince "P> of buy alternative is

positive and "P> of lease alternativeis negative buy alternative will be

chosen.


12/15

7-12

"ro#lem

The buy alternative of a company has"P>C -:000. The cost of asset is

Tk.+20000 and will be depreciated understraight-line method for , years period.Dy leasing initially Tk.+20000 can be

saved. An annual lease payment isTk.:0000) tax rate is 21 and borrowingrate is *01. omment about the

nancing decision.


13/15

7-13

Leasing in $slamic%inance

&perating i'arah (i'arah tashgheeliah):According to operating i9arah) an owner of aproperty leases it to others for a specied

period. The ownership of the leased propertyremains with the owner at the end of the leasetenor. ;or example) an #slamic bank could havesome properties&assets on its books for lease.

These properties&assets will remain on thebank4s books at the end of i9arah. Typically) thisoperating lease is not preceded by a promiseby the owner to sell it to the lessor.


14/15

7-14


%inancial i'arah (i'arah m*ntahia#ittamlee+): This is a modern form of i9arahthat has been created following the evolution

of #slamic banking and nance. #t constitutes aform of i9arah in which ownership is transferredto the lessee at the end of a specic period.According to the method of ownership transfer)

this particular type of i9arah can be classiedinto following types(


15/15

7-15


i) $'arah m*ntahia #ittamlee+ thro*ghhi#ah (gift)( where legal title is transferred tothe lessee without any more payments. Thenancial lease that is associated with hibah-type transfer is widely used by #slamic banks.ii) $'arah m*ntahia #ittamlee+ thro*gh

#a,i (sale)( in this type of i9arah) the leaseagreement is executed with an understandingthat the lessor will sell the property to thelessee at the end of i9arah tenor.

7.leasing company

Documents