The Pros & Cons of leasing

1) The Pros & Cons of leasing
a) Definition:
 A lease is a contractual agreement between a lessee and
lessor.
 The lessor owns the asset and for a fee allows the lessee to
use the asset.
b) Types:
 Operating lease
 Financial lease:
Pros Cons
Lease payment is tax deductible.
Taxes can be reduced by leasing.
The agency cost problem: In a lease,
the lessor will transfer all rights to the
lessee for a specific period of time =>
the lessee who controls the asset is
not the owner of the asset, the lessee
may not exercise the same amount of
care as if it were his/her own asset.
Impact on profitability (effect on ROA
and net income)
The lease contract may reduce certain
types of uncertainty.
Lower cash flow required upfront
versus buy option
Conclusion: A lease payment is like the debt service on a
secured bond issued by the lessee. A simple method for
evaluating leases: discount all cash flows at the aftertax interest
rate on secured debt issued by the lessee.
2) Leasing vs Borrowing
Definition:
Leasing:
 A lease is a contractual agreement between a lessee and
lessor.
 The lessor owns the asset and for a fee allows the lessee to
use the asset.
 Operating lease vs Financial lease
Borrowing: