1、McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.21-0Chapter Outline21.1 Types of Leases21.2 Accounting and Leasing21.3 Taxes, the IRS, and Leases21.4 The Cash Flows of Leasing21.5 A Detour on Discounting and Debt Capacity with Corporate Taxes21.6 NPV Analysis o

2、f the Lease-versus-Buy Decision21.7 Debt Displacement and Lease Valuation21.8 Does Leasing Ever Pay: The Base Case21.9 Reasons for Leasing21.10 Some Unanswered QuestionsMcGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.21-121.1 Types of Leases The Basics A lease

3、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.McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.21-2Operating Leases Usually not fully amortized. Usually require the lessor to ma

4、intain and insure the asset. Lessee enjoys a cancellation option.McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.21-3Financial LeasesThe exact opposite of an operating lease.1.Do not provide for maintenance or service by the lessor.2.Financial leases are fully

5、amortized.3.The lessee usually has a right to renew the lease at expiry.4.Generally, financial leases cannot be cancelled.McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.21-4Sale and Lease-Back A particular type of financial lease. Occurs when a company sells a

6、n asset it already owns to another firm and immediately leases it from them. Two sets of cash flows occur: The lessee receives cash today from the sale. The lessee agrees to make periodic lease payments, thereby retaining the use of the asset.McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Compan

7、ies, Inc. All rights reserved.21-5Leveraged Leases A leveraged lease is another type of financial lease. A three-sided arrangement between the lessee, the lessor, and lenders. The lessor owns the asset and for a fee allows the lessee to use the asset. The lessor borrows to partially finance the asse

8、t. The lenders typically use a nonrecourse loan. This means that the lessor is not obligated to the lender in case of a default by the lessee.McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.21-621.2 Accounting and Leasing In the old days, leases led to off-bala

9、nce-sheet financing. Today, leases are either classified as capital leases or operating leases. Operating leases do not appear on the balance sheet. Capital leases appear on the balance sheetthe present value of the lease payments appears on both sides.McGraw-Hill/IrwinCopyright 2002 by The McGraw-H

10、ill Companies, Inc. All rights reserved.21-7Accounting and LeasingBalance SheetTruck is purchased with debtTruck$100,000Debt$100,000Land$100,000Equity$100,000Total Assets$200,000Total Debt & Equity $200,000Operating LeaseTruckDebtLand$100,000Equity$100,000Total Assets$100,000Total Debt & Equ

11、ity $100,000Capital LeaseAssets leased$100,000Obligations under capital lease$100,000Land$100,000Equity$100,000Total Assets$200,000Total Debt & Equity$200,000McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.21-8Capital Lease A lease must be capitalized if an

12、y one of the following is met: The present value of the lease payments is at least 90 percent of the fair market value of the asset at the start of the lease. The lease transfers ownership of the property to the lessee by the end of the term of the lease. The lease term is 75 percent or more of the

13、estimated economic life of the asset. The lessee can buy the asset at a bargain price at expiry.McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.21-921.3 Taxes, the IRS, and Leases The principal benefit of long-term leasing is tax reduction. Leasing allows the t

14、ransfer of tax benefits from those who need equipment but cannot take full advantage of the tax benefits of ownership to a party who can. Naturally, the IRS seeks to limit this, especially if the lease appears to be set up solely to avoid taxes.McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Comp

15、anies, Inc. All rights reserved.21-1021.3 Taxes, the IRS, and LeasesThe lessee can deduct lease payments if the lease is qualified by the IRS.1. The term must be less than 30 years.2. There can be no bargain purchase option.3. The lease should not have a schedule of payments that is very high at the

16、 start of the lease and low thereafter. 4. The lease payments must provide the lessor with a fair market rate of return.5. The lease should not limit the lessees right to issue debt or pay dividends.6. Renewal options must be reasonable and reflect fair market value of the asset.McGraw-Hill/IrwinCop

17、yright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.21-1121.4 The Cash Flows of LeasingConsider a firm, ClumZee Movers, that wishes to acquire a delivery truck.The truck is expected to reduce costs by $4,500 per year.The truck costs $25,000 and has a useful life of 5 years.If the firm

18、 buys the truck, they will depreciate it straight-line to zero. They can lease it for 5 years from Tiger Leasing with an annual lease payment of $6,250.McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.21-1221.4 The Cash Flows of Leasing Cash Flows: BuyYear 0Year

19、s 1-5Cost of truck$25,000After-tax savings4,500(1-.34) = $2,970Depreciation Tax Shield5,000(.34) = $1,700$25,000$4,670 Cash Flows: LeaseYear 0Years 1-5Lease Payments6,250(1-.34) = $4,125After-tax savings4,500(1-.34) = $2,970$1,155 Cash Flows: Leasing Instead of BuyingYear 0Years 1-5$25,000 $1,155 $4

20、,670 = $5,825McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.21-1321.4 The Cash Flows of Leasing Cash Flows: Leasing Instead of BuyingYear 0Years 1-5$25,000 $1,155 $4,670 = $5,825 Cash Flows: Buying Instead of Leasing Year 0Years 1-5$25,000 $4,670 $1,155 = $5,8

21、25 However we wish to conceptualize this, we need to have an interest rate at which to discount the future cash flows. That rate is the after-tax rate on the firms secured debt.McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.21-1421.5 A Detour on Discounting an

22、d Debt Capacity with Corporate Taxes Present Value of Riskless Cash Flows In a world with corporate taxes, firms should discount riskless cash flows at the after-tax riskless rate of interest. Optimal Debt Level and Riskless Cash Flows In a world with corporate taxes, one determines the increase in

23、the firms optimal debt level by discounting a future guaranteed after-tax inflow at the after-tax riskless interest rate.McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.21-1521.6 NPV Analysis of the Lease-vs.-Buy Decision A lease payment is like the debt servic

24、e on a secured bond issued by the lessee. In the real world, many companies discount both the depreciation tax shields and the lease payments at the after-tax interest rate on secured debt issued by the lessee.McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.21-

25、16NPV Analysis of the Lease-vs.-Buy Decision20.219$)05. 1 (825, 5$000,25$51ttNPV20.219$)05. 1 (825, 5$000,25$51ttNPVNPV Buying Instead of Leasing Year 0Years 1-5-$25,000 $4,670 $1,155 = $5,825 There is a simple method for evaluating leases: discount all cash flows at the after-tax interest rate on s

26、ecured debt issued by the lessee. Suppose that rate is 5 percent.NPV Leasing Instead of BuyingYear 0Years 1-5$25,000 $1,155 $4,670 = -$5,825McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.21-1721.7 Debt Displacement and Lease Valuation Considering the issues of

27、 debt displacement allows for a more intuitive understanding of the lease versus buy decision. Leases displace debtthis is a hidden cost of leasing. If a firm leases, it will not use as much regular debt as it would otherwise. The interest tax shield will be lost.McGraw-Hill/IrwinCopyright 2002 by T

28、he McGraw-Hill Companies, Inc. All rights reserved.21-1821.7 Debt Displacement and Lease Valuation The debt displaced by leasing results in forgone interest tax shields on the debt that ClumZee movers didnt go into when they leased instead of bought the truck. Suppose ClumZee agrees to a lease payme

29、nt of $6,250 before tax. This payment would support a loan of $25,219.20 (see the next slide) In exchange for this, they get the use of a truck worth $25,000. Clearly the NPV is a negative $219.20, which agrees with our earlier calculations.McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companie

30、s, Inc. All rights reserved.21-1921.7 Debt Displacement and Lease ValuationSuppose ClumZee agrees to a lease payment of $6,250 before tax. This payment would support a loan of $25,219.20012345Outstanding Balance of the Loan$25,219.20$20,655.16$15,862.92$10,831.07$5,547.62$0.00Interest$1,910.55$1,564

31、.78$1,201.74$820.54$420.27Tax Deduction on interest$649.59$532.03$408.59$278.98$142.89After-tax Interest Expense$1,260.96$1,032.76$793.15$541.55$277.38Extra Cash that purchasing firm genereates over leasing firm5,825.00$ 5,825.00$ 5,825.00$ 5,825.00$ 5,825.00$ 05. 020.219,25$96.260, 1$ After-Tax Lea

32、se Payments6,250(1-.34) = $4,125Forgone Depreciation Tax Shield 5,000(.34) = $1,700-$5,825 Calculate the increase in debt capacity by discounting the difference between the cash flows of the purchase and the cash flows of the lease by the after-tax interest rate. 96.260, 1$.825, 5$20.219,25$16.655,2

33、0$McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.21-2021.8 Does Leasing Ever Pay: The Base Case In the above example, ClumZee Movers chose to buy, because the NPV of leasing was a negative $219.20 Note that this is the opposite of the NPV that Tiger Leasing wo

34、uld have:20.219$)05. 1 (825, 5$000,25$51ttNPV Cash Flows: Tiger LeasingYear 0Years 1-5Cost of truck$25,000Depreciation Tax Shield5,000(.34) = $1,700Lease Payments6,250(1-.34) = $4,125 $25,000 $5,825McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.21-2121.9 Reaso

35、ns for Leasing Good Reasons Taxes may be reduced by leasing. The lease contract may reduce certain types of uncertainty. Transactions costs can be higher for buying an asset and financing it with debt or equity than for leasing the asset. Bad Reasons AccountingMcGraw-Hill/IrwinCopyright 2002 by The

36、McGraw-Hill Companies, Inc. All rights reserved.21-22A Tax ArbitrageSuppose ClumZee movers is actually in the 25% tax bracket and Tiger Leasing is in the 34% tax bracket. If Tiger reduces the lease payment to $6,200, can both firms have a positive NPV?Cash Flows: Tiger LeasingYear 0Years 1-5Cost of

37、truck$25,000Depreciation Tax Shield5,000(.34) = $1,700Lease Payments6,200(1 .34) = $4,092 $25,000 $5,792NPV = 76.33Cash Flows ClumZee Movers: Leasing Instead of BuyingYear 0Years 1-5Cost of truck we didnt buy$25,000Lost Depreciation Tax Shield5,000(.25) = $1,250After-Tax Lease Payments6,200(1 .25) =

38、 $4,650 $25,000 $5,900NPV = -$543.91McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.21-23Reservations and Negotiations What is the smallest lease payment that Tiger Leasing will accept? Set their NPV to zero and solve for $Lmin:Cash Flows: Tiger LeasingYear 0Ye

39、ars 1-5Cost of truck-$25,000Depreciation Tax Shield5,000(.34) = $1,700Lease Payments$Lmin (1 .34) = $Lmin .66 -$25,000 $1,700 + $Lmin .6651min)05. 1 (700, 1$66.000,25$0ttLNPV5151min)05. 1 (700, 1$)05. 1 (1$66.000,25$ttttL5151min)05. 1 (1$66.)05. 1 (700, 1$000,25$ttttL29.173, 6$minLMcGraw-Hill/IrwinC

40、opyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.21-24Reservations and Negotiations What is the highest lease payment that ClumZee Movers can pay? Set their NPV to zero and solve for $Lmax:Cash Flows ClumZee Movers: Leasing Instead of BuyingYear 0Years 1-5Cost of truck we didnt b

41、uy$25,000Lost Depreciation Tax Shield5,000(.25) = $1,250After-Tax Lease Payments $Lmax( 1 .25) = .75 Lmax $25,000 1,250 .75 Lmax51max)05. 1 (250, 1$75.000,25$0ttLNPV5151max)05. 1 (250, 1$)05. 1 (75.000,25$ttttL5151max)05. 1 (75.)05. 1 (250, 1$000,25$ttttL49.032, 6$maxLNo lease is possible: Lmin Lmax

42、McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.21-2521.10 Some Unanswered Questions Are the Uses of Leases and of Debt Complementary? Why are Leases offered by Both Manufacturers and Third Party Lessors? Why are Some Assets Leased More than Others?McGraw-Hill/

43、IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.21-2621.11 Summary and ConclusionsThere are three ways to value a lease.1. Use the real-world convention of discounting the incremental after-tax cash flows at the lessors after-tax rate on secured debt.2. Calculate the incre

44、ase in debt capacity by discounting the difference between the cash flows of the purchase and the cash flows of the lease by the after-tax interest rate. The increase in debt capacity from a purchase is compared to the extra outflow at year 0 from a purchase.3. Use APV (presented in the appendix to

45、this chapter).They all yield the same answer.The easiest way is the least intuitive.McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.21-27Appendix 21A: APV Approach to LeasingAPV = All-Equity Value + Financing NPVCalculations shown on the following slides will s

46、how that for the latest Clumzee Movers example (tax rate is 25%)APV = $591.38 $1,135.30APV = $543.91Which is the same value as the easier NPV analysis.McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.21-28Appendix 21A: APV Approach to LeasingAPV = All-Equity Val

47、ue + Financing NPV To find the all-equity value, discount the cash flows at the pre-tax interest rate. The after tax rate was 5% which implies a pretax rate of 6.66% = 5%/(1-.25).38.591$)06667. 1 (900, 5$000,25$ueequity val-All51ttCash Flows ClumZee Movers: Leasing Instead of BuyingYear 0Years 1-5Co

48、st of truck we didnt buy$25,000Lost Depreciation Tax Shield5,000(.25) = $1,250After-Tax Lease Payments6,200(1 .25) = $4,650 $25,000 $5,900McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.21-29Appendix 21A: APV Approach to LeasingAPV = All-Equity Value + Financin

49、g NPV The NPV of the financing is the forgone interest tax shields on the debt that ClumZee movers didnt go into when they leased instead of bought the truck. ClumZee agreed to a lease payment of $5,900. This payment would support a loan of $25,543.9151)05. 1 (900, 5$91.543,25$capacitydebt Increased

50、ttMcGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.21-30Appendix 21A: APV Approach to Leasing5432)06667. 1 (65.93$)06667. 1 (84.182$)06667. 1 (79.267$)06667. 1 (69.348$)06667. 1 (73.425$30.135, 1$91.543$30.135, 1$38.591$APVThe lost interest tax shield associated

51、 with this additional debt capacity of $25,543.91 has a present value of $1,135.30012345Outstanding Balance of the Loan $25,543.91$20,921.11$16,067.16$10,970.52$5,619.05$0.00Interest$1,702.93$1,394.74$1,071.14$731.37$374.60Tax Deduction on interest$425.73$348.69$267.79$182.84$93.65After-tax Interest

52、 Expense$1,277.20$1,046.06$803.36$548.53$280.95McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.21-3121.7 Debt Displacement and Lease Valuation5432)06667. 1 (65.93$)06667. 1 (84.182$)06667. 1 (79.267$)06667. 1 (69.348$)06667. 1 (73.425$30.135, 1$91.543$30.135, 1

53、$38.591$APVThe lost interest tax shield associated with this additional debt capacity of $25,219.20 has a present value of $012345Outstanding Balance of the Loan$25,219.20$20,655.16$15,862.92$10,831.07$5,547.62$0.00Interest$1,910.55$1,564.78$1,201.74$820.54$420.27Tax Deduction on interest$649.59$532

54、.03$408.59$278.98$142.89After-tax Interest Expense$1,260.96$1,032.76$793.15$541.55$277.38Extra Cash that purchasing firm genereates over leasing firm5,825.00$ 5,825.00$ 5,825.00$ 5,825.00$ 5,825.00$ McGraw-Hill/IrwinCopyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.21-32Appendix 21A: APV Approach to LeasingAPV = All-Equity Value + Financing NPVCalculations shown on the following slides will show that for the latest Clumzee Movers exam