Summary
Summary leasing
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Summary of 3 pages for the course Corporate Financial Management at UCT (Complete summary)
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By: maryamgopal • 3 year ago
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MODULE 6: LEASINGLease
Contract providing a right to the use of an asset, legally owned by the lessor, in
exchange for a specified rental paid by the lessee
Source of finance
Lease rentals are included in the gross taxable income of the lessor and the lessee
deducts the lease rentals when calculating taxable income
Options lessee has at the end of the lease term:
1. Renewal of lease
2. Acquisition of asset
3. Return of asset to lessee
Types of leases
1. Finance lease
Lease that transfers all risks and rewards associated with ownership of an asset from
the lessor to the lessee. The lessee normally pays for the asset’s insurance, repairs
and maintenance.
2. Operating lease
Lease other than a finance lease. Lessor normally pays for the asset’s insurance,
repairs and maintenance.
Direct lease: lessor is the manufacturer
Sale & lease back: company sells an asset it owns under an agreement to lease it
back
Benefits of leasing
1. No large outlay of cash at the beginning therefore less capital expenditure
requirements
2. Flexibility – lease can be for a long or short period
3. No risk of obsolescence – leasing enables companies to stay current with new and
faster technologies
4. Obtaining 100% debt financing – easier to obtain lease finance than loans from
commercial lenders
5. Tax benefits – leasing offers potential tax benefits depending on who it is structured
6. Inflation friendly – there are no increases in payments during the lease term
7. Better match revenue with expenditure by paying for the asset while it is used to
generate income
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