Direct Financing, Residual Value, Capital/Operating Leases
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1) What are the differences between a direct-financing and a sales-type lease for a lessor? Why would a lessor provide direct-financing to a lessee? What types of organizations provide direct-financing leases?
2)What is residual value? What is the implication to the lessee if the residual value is guaranteed or unguaranteed? What is the implication to the lessor?
3)What are the advantages of operating and capital leases? What are the disadvantages? Why would a company pick one over the other?
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Solution Summary
1) What are the differences between a direct-financing and a sales-type lease for a lessor? Why would a lessor provide direct-financing to a lessee? What types of organizations provide direct-financing leases?
2)What is residual value? What is the implication to the lessee if the residual value is guaranteed or unguaranteed? What is the implication to the lessor?
3)What are the advantages of operating and capital leases? What are the disadvantages? Why would a company pick one over the other?
Solution Preview
1 - A direct financing lease is a lease where revenue is derived from the lease payments and the interest on the lease payments. A typical direct financing lease is a new car lease. This type of lease is an alternative form to a private loan that would be used for the same purchase. A sales type lease is a lease does not involve direct financing. The revenue from a direct sales lease is generated through lease payments without interest. An apartment lease would be a common example. A lessor would provide direct financing to a lessee because the lessor would collect more on the investment due to the interest portion of the payments. Car dealerships and companies that lease equipment would be good examples.
2 - Residual value is the amount that an asset is worth after the lease term or after the asset has lived it's useful life. The residual value is what ...
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