Corporate Finance Ross Westerfield Jaffe Sixth Edition Sixth Edition 21 Chapter Twenty One Leasing Chapter Outline Types of Leases Accounting and Leasing Taxes, the IRS, and Leases The Cash Flows of Leasing A Detour on Discounting and Debt Capacity with Corporate Taxes NPV Analysis of the Lease-versus-Buy Decision Debt Displacement and Lease Valuation Does Leasing Ever Pay: The Base Case Reasons for Leasing Some Unanswered Questions Types of Leases The Basics 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 Leases Usually not fully amortized. Usually require the lessor to maintain and insure the asset. Lessee enjoys a cancellation option. Financial Leases The exact opposite of an operating lease. Do not provide for maintenance or service by the lessor. Financial leases are fully amortized. The lessee usually has a right to renew the lease at expiry. Generally, financial leases cannot be cancelled. Sale and Lease-Back A particular type of financial lease. Occurs when pany sells an 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. Leveraged 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 asset. 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. Accounting and Leasing In the old days, leases led to off-balance-sheet financing. Today, leases are either classified as capital leases or operating leases. Operatin
