Lease Finance and Investment Banking PDF

Lease Finance and Investment
Banking
Department Of Finance
Jagannath University,
Dhaka.
Prepared By Md.
Mazharul Islam (Jony) ID
no:091541, 3rd Batch.
Department of Finance.
Jagannath University.
Email:jony007ex@gmail.
com Mobile:
01198150195
Lease Finance and Investment Banking

A Simple Solution
About the
Author
Md. Mazharul Islam Jony, studying BBA, major in Finance at

Jagannath University, Dhaka. He is completed his HSC from
Cantonment College, Jessore and SSC from Chowgacha
Shahadat Pilot High School, Chowgacha, Jessore with the highest
performance result in 2006 and 2008 consecutively. His favorite
hobby is to search new teaching technique and learning method.
Md. Mazharul Islam

(Jony) ID no:091541, 3rd
Batch. Department of
Finance. Jagannath
University.
com Mobile:
01198150195
Name of chapters included in this book

number
chapter Page no.
Serial
Lease Finance: 1-40

1 Introduction 2-5 2 Introduction to leasing 6-12 3 Economics of leasing 13-19 4
Accounting aspects of lease financing 20-22 4.1 Mathematical problems and
solution 23-32 5 Tax aspects of leasing 33 6 Equipment lease financing 34-39 7
Sale and lease back in real estate 40-45 Short Notes 46-52 Investment Banking:
54-103
8 Investment Banking 55-62 9 Laws governing Investment Banking 63-64 10
Investment Banking Process and IPOs 65-70 11 Corporate Finance 71-77 12
Trading 78-83 13 Financial Engineering 84-90 13.1 Financial Engineering:
Derivatives Instrument 91-98
14 Merchant Banking and Other activities 99-102
Department of Finance Jagannath University
Lease
Finance
Chapter 1
Introduction
Concept of Lease Finance: (Q 1a: 2010, 2011) A lease could be

generally defined as, A contract where a party being the owner (lessor) of an asset (leased
asset) provides the asset for use by the lessee at a consideration (rentals), either fixed or
dependent on any variables, for a certain period (lease period), either fixed or flexible, with an
understanding that at the end of such period, the asset, subject to the embedded options of
the lease, will be either returned to the lessor or disposed off as per the lessor‘s instructions.
Leasing was prevalent during the ancient Sumerian and Greek civilizations where leasing of
land, agricultural implements, animals mines and ships took place. The practice of leasing
came into being sometime in the later half of the 19th century where the rail road
manufacturers in the U.S.A resorted to leasing of rail cars and locomotives.
The equipment leasing industry came into being in 1973 when the first leasing company,
appropriately named as First Leasing This industry however remained relegated to the
background until the early eighties, because the need for these industry was not strongly felt
in industry. The public sector financial institutions – IDBI, IFCI, ICICI and the State Financial
Corporation‘s (SCFs) provided bulk of the term loans and the commercial banks provided
working capital finance required by the manufacturing sector on relatively soft terms. Given
the easy availability of funds at reasonable cost, there was obvious no need to look for
alternative means of financing.
The credit squeeze announced by the R.B.I coupled with the strict implantation of the Tandon
& Chore committees‘ norms on Maximum Permissible Bank Finance (MPBF) for working
capital forced the manufacturing companies to divert a portion of their long – term funds for
their working capital.
History and development of

Leasing:
The history of leasing dates back to 200BC when Sumerians leased goods. Romans had
developed a full body law relating to lease for movable and immovable property. However the
modern concept of leasing appeared for the first time in 1877 when the Bell Telephone
Company began renting telephones in USA. In 1832, Cottrell and Leonard leased academic
caps, grown and hoods. Subsequently, during 1930s the Railway Industry used leasing
service for its rolling stock needs. In the post war period, the American Air Lines leased their
jet engines for most of the new air crafts. This development ignited immediate popularity for
the lease and generated growth of leasing industry.
The concept of financial leasing was pioneered in India during 1973. The First Company was
set up by the Chidambaram group in 1973 in Madras. The company undertook leasing of
industrial equipment as its main activity. The Twentieth century Leasing Company Limited
was established in 1979. By 1981, four finance companies joined the fray. The performance
of First Leasing Company Limited and the Twentieth Century Leasing Company Limited
motivated others to enter the leasing industry. In 1980s financial institutions made entry into
leasing business. Industrial Credit and Investment Corporation was the first all India financial
institution to offer leasing in
Jagannath University Department of Finance Md. Mazharul Islam Jony 2 | Page

1983. Entry of commercial banks into leasing was facilitated by an amendment of Banking
Regulation Act, 1949. State Bank of India was the first commercial bank to set up a leasing
subsidiary, SBI capital market, in October 1986. Can Bank Financial Services Ltd., BOB
Financial Service Ltd., and PNB Financial Services Limited followed suit. Industrial Finance
Corporation‘s Merchant Banking division started financing leasing companies as well as
equipment leasing and financial services. There was thus virtual explosion in the number of
leasing companies rising to about 400 companies in 1990.
In the subsequent years, the adverse trends in capital market and other factors led to a
situation where apart from the institutional lessors, there were hardly 20 to 25 private leasing
companies who were active in the field. The total volume of leasing business companies was
Rs.5000 crores in 1993 and it is expected to cross Rs.10, 000 crores by March 1995.
Background of Leasing in
Bangladesh:
Lease financing was first introduced in Bangladesh in the early 1980s. Industrial
Development Leasing Company of Bangladesh Ltd. (idlc), the first leasing company of the
country, was established in 1986 under the regulatory framework of BANGLADESH BANK. It was
a joint venture of the Industrial Promotion and Development Company of Bangladesh Ltd.
(ipdc), International Finance Corporation, and Korea Development Leasing Corporation.
Another leasing firm, the U NITED LEASING COMPANY Ltd. started its operations in 1989. The
number of leasing companies grew quickly after 1994 and by the year 2000, rose to 16. The
leasing business became competitive with the increase in the number of companies and
wider distribution of their market share. There are, however, 6 other companies conducting
leasing business in the country, although they do not use the word leasing in their names. In
terms of money value, the leasing business in Bangladesh increased from Tk 41.44 million in
1988 to Tk 3.16 billion in 2000.
The leasing companies now operating in the country are Industrial Development Leasing
Company of Bangladesh, United Leasing Company, GSP Finance Company (Bangladesh),
Uttara Finance and Investments, Bay Leasing and Investment, Phoenix Leasing Company,
Prime Finance and Investment, International Leasing and Financial Services, Union Capital,
Vanik Bangladesh, Peoples Leasing and Financial Services, Bangladesh Industrial Finance
Company, UAE- Bangladesh Investment Company, Bangladesh Finance and Investment
Company, and First Lease International.
Lease financing, as organised in Bangladesh, operates with the following objectives: (a) to
assist the development and promotion of productive enterprises by providing equipment
lease financing and related services; (b) to assist in balancing, modernisation, replacement
and expansion of existing enterprises; (c) to extend financial support to small and medium
scale enterprises; (d) to provide finance for various agriculture equipment; and (e) to activate
the capital market by operating as managers to the issue, underwriters, or portfolio
managers.
The functions of a lease business include lease financing, short-term financing, house
building financing, and merchant banking and corporate financing. In this last group of
functions, the leasing business in Bangladesh moved away from regular leasing activities and
is now involved in stock-market related activities such as issue management, underwriting,
trust management, private placement, portfolio management, and mutual fund operation.
Broad capital market operations of the lease financing institutions include bridge financing,
corporate counseling, mergers and acquisition, capital restructuring, financial engineering,
and lease syndication. Prominent among

the sectors of the economy that now receive lease financing services are textiles, apparels
and accessories, transport, construction and engineering, paper and printing,
pharmaceuticals, food and beverage, chemicals, agro-based industries, telecommunications,
and leather and leather products.
Commercial banks and development finance institutions (DFIs) have been the traditional
lending institutions in Bangladesh. In fact, the concept of lease financing is a relatively new
one in the country. Initially, leasing companies had to adopt the role of educators to make
Bangladeshi entrepreneurs aware of the benefits of leasing. However, as DFIs demonstrated
poor recovery and fund recycling performances, leasing got the opportunity to develop as an
alternative source of funding. A few other factors also contributed to development of the
leasing business in the country. For example, the commercial banks have been keener in
providing trade financing and F OREIGN EXCHANGE dealings rather than long-term loans
because of the risks involved and their longer gestation period. The selection of lease
proposals is relatively free from extraneous pressure and is subject to a quality level
appraisal. Under lease agreements in the private sector, projects are sanctioned and
implemented expeditiously, resulting in benefits in time and cost savings. Private leasing
companies also attract clients by providing relatively better services. The down payments in
leasing are not high and the gestation period is low. Also, in case of lease financing,
incidental costs incurred in the process of import clearing, installation, and commercial
production are capitalised, which substantially reduce the initial investment.
Leasing companies, however, face some problems in conducting their business in the
country. The relatively slow growth of the demand side compared to the fast growth of the
lease business is one such problem. This leads many leasing companies to operate in partial
capacity. The culture of loan default that prevails in the country is also a deterrent. Leasing
companies often find it difficult to raise funds through short- or long-term borrowing from
money and capital markets. They are hard pressed to deal with the financial assets because
of the present laws of the country, which are also not fully enforceable.
Leasing business is gaining increased importance in the economy of Bangladesh with its
gradual transformation from an agrarian to industrial one. The government periodically
revises the trade and industrial policy to create a liberal business environment both for
domestic and foreign investment. Increased investment in the energy sector as well as in
power, transport, telecommunications, water and sanitation, and safe disposal of wastes is
expected to bring further opportunities for leasing industries.
Importance of Lease Finance (Q: 2b,

2010)
Lease finance or lease financing means contract between owner of asset and user of asset.
In this contract only rent is paid at periodical intervals for using of asset by user. If user of
asset has no money to pay initial amount of leasing contract, he can also do contract with
third part to pay initial amount or specific period rent of lease. It will be also lease finance. In
following words, we can explain its importance,
 Lease finance is easy to get than getting loan for buying all fixed assets.  Monthly
rent payment for lease finance will be operating expenses. It will be allowed to
deduct total income. So, company can get tax benefits in lease
financing.

 It can show as invisible debt of company out of its balance sheet. You can show lease
finance in the footnote of balance sheet, if you did contract directly with the owner of
asset.  One of major important point is that it is more flexible way of finance. You can fix
your
need of asset and get it one lease through lease financing.  A study from IFC has
revealed that 30% of total share of lease financing as investment of fixed asset is of
emerging and developed economies and now 15% of developing countries.
Legal aspects of leasing Essentially the following implications for the
lessor and the lessee must be maintained.
 The lessor has the duty to deliver the asset to the lessee, to legally authorise the
lessee to use the asset, and to leave the asset in peaceful possession of the lessee
during the currency of the agreement.  The lessor has the obligation to pay the lease
rentals as specified in the lease agreement, to protect the lessor‘s title, to take
reasonable care of the asset, and to return the leased asset on the expiry of the lease
period.
Contents of a lease agreement: The lease agreement specifies the legal rights
and obligations of the lessor and the lessee. It typically contains terms relating to the
following:
 Description of the lessor, the lessee, and the equipment.  Amount, time and place of
lease rentals payments.  Time and place of equipment delivery.  Lessee‘s
responsibility for taking delivery and possession of the leased equipment.  Lessee‘s
responsibility for maintenance, repairs, registration, etc. and the lessor‘s right in
case of default by the lessee.  Lessee‘s right to enjoy the benefits of the warranties
provided by the equipment
manufacturer/supplier.  Insurance to be taken by the lessee on behalf of the lessor. 
Variation in lease rentals if there is a change in certain external factors like bank interest
rates, depreciation rates, and fiscal incentives. 
Options of lease renewal for the lessee.  Return
of equipment on expiry of the lease period. 
Arbitration procedure in the event of dispute.
Prepared By Md.
com Mobile:
01198150195
Chapter 2 Introduction to
leasing
Lease: Conceptually, a lease may be defined as a contractual arrangement/transaction in

which a party owning an asset/ equipment (lessor) provides the asset for use to another/
transfers the right to use the equipment to the user (lessee) over a certain/for an agreed
period of time for consideration in the form of/in return for periodic payment (rentals) with or
without a further payment (premium). At the end of the period of contract (lease period), the
asset/ equipment reverts back to the lessor unless there is a provision for the renewal of the
contract.
Leasing essentially involves the divorce of ownership from the economic use of an
asset/ equipment. It is a contract in which a specific equipment required by the lessee is
purchased by the lessor (financier) from a manufacturer/vendor selected by the lessee. The
lessee has possession and use of the asset on payment of the specified rentals over a
predetermined period of time. Leasing is, thus, a device of financing/money lending.
GAAP defines a lease as ―an agreement conveying the right to use property, plant, or
equipment usually for a stated period of time.‖ A lease involves a lessee and a lessor. A
lessee acquires the right to use the property, plant, and equipment; a lessor gives up the
right.
The position of a lessee is akin to that of a person who owns the same asset with borrowed
money. The real function of a lessor is not renting of asset but lending of funds/finance/credit
and lease financing is, in effect, a contract of lending money. The lessor (financier) is the
nominal owner of the asset as the possession and economic use of the equipment vests in
the lessee. The lessee is free to choose the asset according to his requirements and die
lessor does not take recourse to the equipment as long as the rentals are regularly paid to
him.
Essentials of Lease
Financing
The essential elements of leasing are the following: Parties to the Contract: There are
essentially two parties to a contract of lease financing, viz. the owner and the user,
respectively called the lessor and the lessee. Lessors as well as lessees may be individuals,
partnerships, joint stock companies, corporations or financial institutions. Sometimes, there
may be joint lessors or joint lessees, particularly where the properties or the amount of
finance involved is enormous.
Lease-broker: There may be a lease-broker who acts as an intermediary in arranging lease

deals. Merchant banking divisions of certain foreign banks in India, subsidiaries of some
Indian banks and even some private merchant bankers are acting as lease-brokers. They
charge certain percentage of fees for their services, ranging between 0.50 to 1 percentages.
Lease financier: A lease contract may involve a lease financier, who refinances the lessor,
either by providing term loans or by subscribing to equity or under a specific refinance
scheme.
Asset: The asset, property or equipment to be leased is the subject-matter of a contract of

lease financing. The asset may be an automobile, plant and machinery, equipment, land and
building,

factory, a running business, aircraft, and so on. The asset must, however, be of the lessee's
choice suitable for his business needs.
Ownership Separated from User: The essence of a lease financing contract is that during
the lease-tenure, ownership of the asset vests with the lessor and its use is allowed to the
lessee. On the expiry of the lease tenure, the asset reverts to the lessor.
Types of Lessors Lessors generally
come in one of four varieties:
1. Captive leasing companies: These are usually subsidiaries of a parent

company that
manufactures the product being leased, e.g., IBM Credit Corp. leases IBM computers.
2. Commercial banks: Companies enter into leasing agreements with banks they
already do
business with or by other means. Sometimes banks buy and sell their lease portfolios,
or serve as the front end for an outside leasing service. 3. Independent leasing
companies: These firms typically are unaffiliated with the
manufacturer or the lessee and derive most of their business from leasing to
businesses, e.g., GE Capital provides general leasing and financing services for a
diverse range of commercial and industrial equipment. 4. Brokers: Leasing
brokerages act as intermediaries to link lessees and lessors.
Types of Leasing
FASB (Financial Accounting Standards Board) divides lease from the lessee‘s standpoint
into groups, capital lease and operating lease. Also two types of hybrid lease discussed
most commonly and that are leveraged leases and sale and leaseback.
1. Finance Lease or Net Lease or Capital Lease: (Q: 2a, 2010 1b, 2011) An agreement
where the lessor receives lease payments to cover its ownership costs. The lessee is
responsible for maintenance, insurance, and taxes. Some finance leases are conditional
sales or hire purchase agreements.
In other words, A long-term lease in which the lessee must record the leased item as an
asset on his/her balance sheet and record the present value of the lease payments as debt.
Additionally, the lessor must record the lease as a sale on his/her own balance sheet. A
capital lease may last for several years and is not callable. It is treated as a sale for tax
purposes. It is also called a financial lease.
Structure of Financial Lease: A finance lease is structured to include the following

features,
 The lessee (the intending buyer) selects the equipment according to his requirements,
from
its manufacturer or distributor.  The lessee negotiates and settles with the
manufacturer or distributor, the price, the delivery
schedule, installation, terms of warranties, maintenance and payment, and
so on.

 The lessor purchases the equipment either directly from the manufacturer or distributor
(under straight- forward leasing) or from the lessee after the equipment is delivered
(under sale and lease back).  The lessor then leases out the equipment to the lessee.
The lessor retains the ownership
while lessee is allowed to use the equipment.  A finance lease may provide a right or
option, to the lessee, to purchase the equipment at a
future date. However, this practice is rarely found in Bangladesh.  The lease period
spreads over the expected economic life of the asset. The lease is originally for a non-
cancelable period called the primary lease period during which the lessor seeks to
recover his investment along with some profit. During this period, cancellation of lease is
possible only at a very heavy cost. Thereafter, the lease is subject to renewal for the
secondary lease period, during which the rentals are substantially low.  The lessee is
entitled to exclusive and peaceful use of the equipment during the entire lease
period provided he pays the rentals and complies with the terms of the lease.  As the
equipment is chosen by the lessee, the responsibility of its suitability, the risk of
obsolescence and the liability for repair, maintenance and insurance of the equipment
rests with the lessee.
The finance company is the legal owner of the asset during duration of the lease.
However the lessee has control over the asset providing them the benefits and risks of
(economic) ownership.
2. Operating Lease or Service Lease (Q: 2a, 2010 1b,
2011)
According to the IAS-17, an operating lease is one which is not a finance lease. In an
operating lease, the lessor does not transfer all the risks and rewards incidental to the
ownership of the asset and the cost of the asset is not fully amortized during the primary
lease period. The lessor provides services (other than the financing of the purchase price)
attached to the leased asset, such as maintenance, repair and technical advice. For this
reason, operating lease is also called service lease. The lease rentals in an operating lease
include a cost for the 'services' provided, and the lessor does not depend on a single lessee
for recovery of his cost. Operating lease is generally used for computers, office equipments,
automobiles, trucks, some other equipment, telephones, and so on.

Structure of Operating Lease:
 An operating lease is-generally for a period significantly shorter than the economic life
of the leased asset. In some cases it may be even on hourly, daily, weekly or monthly
basis. The lease is cancellable by either party - during the lease period.  Since the
lease periods are shorter than the expected life of the asset, the lease rentals are
not sufficient to totally amortize the cost of the assets.  The lessor does not rely on the
single lessee for recovery of his investment. He has the ultimate interest in the residual
value of the asset. The lessor bears the risk of obsolescence, since the lessee is free to
cancel the lease at any time.  Operating leases normally include the maintenance
clause requiring the lessor to maintain
the leased asset and provide services such as insurance, support staff, fuel,
and so on.
3. Leveraged Lease:
There are three parties to the transaction: (i) lessor (equity investor), (ii) lender and (iii)
lessee. In such a lease, the leasing company (equity investor) buys the asset through
substantial borrowing with full recourse to the lessee and without any recourse to itself. The
lender (loan participant) obtains an assignment of the lease and the rentals to be paid by the
lessee are a first mortgaged asset on the leased asset. The transaction is routed through a
trustee who looks after the interest of the lender and lessor. On receipt of the rentals from the
lessee, the trustee remits the debt-service component of the rental to the loan participant and
the balance to the lessor.
4. Sale and leaseback: (Q: 1b, 2011)
In a sale and leaseback transaction, the owner of equipment sells it to a leasing company
which in turn leases it back to the erstwhile owner (the lessee). The ̳leaseback‘ arrangement
in this transaction can be in the form of a ̳finance lease‘ or an ̳operating lease‘. A classic
example of this type of transaction is the sale and leaseback of safe deposit vaults resorted
to by commercial banks. Under this arrangement the bank sells the safe sells the safe
deposit vaults in its custody to a leasing company at a market price which is substantially
higher than the book value.
In general, the ̳sale and leaseback‘ arrangement is a readily available source of funds for
financing the expansion and diversification programs of a firm. In case where capital
investments in the past have been funded by high cost short-term debt, the sale and lease
back transaction provides an opportunity to substitute the short-term debt by medium-term
finance (assuming that the leaseback arrangement is a finance lease). From the leasing
company‘s angle a sale and leaseback transaction poses certain problems. First, it is difficult
to establish a fair market value of the asset being acquired because the secondary market for
the asset may not exist; even if it exists, it may lack breadth. Second, the Income Tax
Authorities can disallow the claim for depreciation on the fair market value if they perceive the
fair market value as not being ̳fair‘.
Before taking on a sale and lease back operation or on a sale and rent back operation, a
company has to take the following elements into consideration:
• Theassets to be sold must be fully owned and free of any security

obligations.
• If
the company's goodwill is pledged in favor of a bank, this bank must give its
consent prior to the deal being signed.

• The
sale of assets can generate either a windfall or shortfall, either of which must be
taken into account from a fiscal and/or accounting point of view.
Opportunities of sale and lease

back
A sale and rent back operation is the answer to many problems your company may be
facing regardless of its size.
• safeguard the availability of capital stock

• preserve the availability of bank credit facilities
• make funds available for a new project
• restructure the debts
• cash in a latent asset appreciation
• realise, in certain conditions, a company tax saving
Some variants of
leases
1. Direct Lease A direct lease can be defined as any lease transaction which is not a ―sale
and leaseback‖ transaction. In other words, in a direct lease, the lessee and the owner are
two different entities. A direct lease can be of two types: Bipartite Lease and Tripartite Lease.
 Bipartite Lease: In a bipartite lease, there are two parties to the transaction – the
equipment supplier cum-lessor and the lessee. The bipartite lease is typically structured
as an operating lease with in-built facilities like up gradation of the equipment (upgrade
lease) or additions to the original equipment configuration. The lessor undertakes to
maintain the equipment and even replaces the equipment that is in need of major repair
with similar equipment in working condition (swap lease). Of course, all these add-ons to
the basic lease arrangement are possible only if the lessor happens to be a manufacturer
or a dealer in the class of equipments covered by the lease.  Tripartite Lease: A
tripartite lease on the other hand is a transaction involving three different parties -the
equipment supplier, the lessor, and the lessee. Most of the equipment lease transactions
fall under this category. An innovative variant of the tripartite lease is the sales-aid lease
where the equipment supplier catalyzes the lease transaction. In other words, he
arranges for lease finance for a prospective customer who is short on liquidity. Sales-aid
leasing can take one of the following forms:
a. The equipment supplier can provide a reference about the customer to the leasing
company. b. The equipment supplier can negotiate the terms of the lease with the
customer and complete
the necessary paper work on behalf of the leasing company. c. The supplier can write
the lease on his own account and discount the lease receivables with
the designated leasing company. d. The effect of the transaction is that the leasing
company owns the equipment and obtains an assignment of the lease rental. By and
large, sales-aid lease is supported by recourse to the supplier in the event of default by
the lessee. The recourse can be in the form of the supplier offering to buy back the
equipment from the lessor in the event of default by the lessee or in the form of providing
a guarantee on behalf of the lessee.
2. Domestic Lease and International

Lease
 Domestic Lease: A lease transaction is classified as domestic if all parties to the
agreement,
namely, equipment supplier, lessor and the lessee, are domiciled in the same
country.
 International Lease: If the parties to the lease transaction are domiciled in different
countries, it is known as international lease. This type of lease is further sub classified into
import lease and cross-border lease.
Comparison between Leasing and

Ownership
Many times, comparisons between leasing and owning come down to little more than a
funding comparison. And certainly, leasing almost always allows a better cash flow for
individuals and corporations.
1. Improvement of cash flow:

The main advantage of leasing is that it frees up cash. Equipment leases rarely require
down payments, though you may have to set aside some cash for a refundable
security deposit. By contrast, loans to finance the purchase of equipment typically
require down payments of up to 25 percent or more.
2. Easier to finance than purchases:
Before extending a capital equipment loan, banks will usually want to see two to three
years of financial records — which most new companies do not have. Leasing
companies, on the other hand, usually require only six months to a year of credit
history before approving a furniture or office equipment lease.
3. Sales Tax Implications:
The impact of sales and use tax can vary dramatically based on whether a vehicle is
leased or owned. Consider this; tax is applied to the lease vehicle's monthly rental
payment instead of being an up-front charge against the vehicle's initial purchase cost.
Paying taxes on the monthly payment stream not only reduces the total tax paid, but
also improves cash flow.
4. Keep pace with technology:

Leasing is especially attractive if your business relies upon cutting-edge technology such
as the latest computers, communications devices, or other equipment. A series of
short-term leases will cost you less than buying new equipment every year or two.
Some office equipment leases even have yearly computer upgrades built into them —
eliminating that difficult decision of whether you can afford to upgrade or not.
5. Allows affording more:
While you might not be able to afford to purchase those pricey ergonomic chairs your
employees are asking for, you may be able to lease them. Better furniture and
equipment can create a more professional image and boost morale and productivity.
6. Balance sheet benefits:

You may be able to exclude some leased assets and related obligations from your balance
sheet. Such moves might improve financial indicators such as your firm's
debt-to-equity ratio or earnings-to-fixed-assets ratio. Bear in mind, however, that
accounting rules do require your balance sheet to report assets leased under certain
types of agreements.
Differences between Finance and Operating Leases: (Q: 2a, 2010,
2d, 2011)
Financial Lease Operating Lease
• Risks and rewards of ownership are transferred to, and borne by, the lessee. This
includes the risks of accidental ruin or damage of the asset (although these risks may
be insured or otherwise assigned). Thus damage that renders an asset unusable does
not exempt the lessee from financial liabilities before the lessor.
•
• Economic ownership with all corresponding rights and responsibilities are borne by the
lessor. The lessor buys insurance and undertake responsibility for maintenance.
•
• The goal of the lessee is either to acquire the asset or at least use the asset for most
of its economic life. As such, the lessee will aim to cover all or most of the full cost of the
asset during the lease term and therefore is likely to assume the title for the asset at the
end of the lease term. The lessee may gain the title for the asset earlier, but not before
the full cost of the asset has been paid off.
•
• Thegoal of the lessee is usage of the leased asset for a specific temporary need, and
hence the operating lease contract covers only the short-term use of the asset. Further,
the duration of an operating lease is usually much shorter than the useful life of the
asset.
•
• The
lessor retains legal ownership for the duration of the lease term, though the lessee
may or may not buy out the leased asset at the end of the lease, with the lessor
charging only a nominal fee for the transfer of asset to the lessee.
•
• It
is not the lessee‘s intention to acquire the asset, and lease payments are determined
accordingly. In addition, an asset under an operating lease may subsequently be rented
out.
•
• The lessee chooses the supplier of the asset and applies to the lessor for funding. This
is significant because the leasing company that funds the transaction should not be
liable for the asset quality, technical characteristics, and completeness, even though it
retains the legal ownership of the asset. The lessee will also generally retain some
rights with respect to the supplier, as if it had purchase asset directly.
• The present value of all lease payments is significantly less than the full asset price.
Chapter 3 Economics of
Leasing
Why Do Companies Lease Equipment? Companies choose operating

leases because the leased asset and the related obligation do not appear on the balance
sheet, allowing them to show a more favorable debt ratio and return on assets. In general,
companies with operating leases report less interest, higher income, and more favorable
returns on equity than companies with capital leases.
 Companies recognize that the value of equipment comes from its use, not its
ownership.  Leasing allows managers to budget more efficiently and get better
equipment without large
initial capital outlays.  Companies lease for efficiency and convenience. 
Leasing permits a close matching of rental payments to revenue produced by using
the
equipment.
What condition will company favor financial lease or operating
lease
Several possible answers can be given to this questions, but it must be considered within the
context of specific situation; in other words, circumstances could arise that would invalidate
the assumptions on which answer are based.
 Companies with low marginal tax rates or low taxable capacity generally find leasing to
be advantageous, because they do not need or cannot obtain the tax advantages
(depreciation) that go with the ownership of the assets. In this case, either type of lease is
appropriate. Companies with high tax rates prefer finance leases, because expenses are
normally higher in early periods.  Operating lease are advantageous when
management compensation depends on return on
assets or invested capital.  An operating lease is advantageous when an entity wants
to keep debt off its Statement of Financial Position. This can help them if they have
indenture covenants requiring low debt to equity ratios or high interest-coverage ratios. 
Finance lease are favored if an entity wants to show a high cash flow from operations. 
Finance lease have advantageous when there is a comparative advantage to reselling
property.
Prepared By Md.
com Mobile:
01198150195
Advantages of lease financing or why do companies lease: (Q: 2a,

2011) Lease financing is one of the better known business strategy followed by most of the
groups we can easily found the plans which are ideal to go with. Lease finance is more useful
for the small and big company for the daily routine transaction. Lease finance we have to give
back after some period, and on that lease finance business have to pay interest. So we can
used lease finance and get more and more benefit. Also we get some other advantages and
they are,
 It offers fixed rate financing; lessee has pay at the same rate
monthly.
 Leasing is inflation friendly. As the costs go up over five years, lessee still pay the
same
rate as when he began the lease, therefore making his dollar stretch farther. (In
addition, the
lease is not connected to the success of the business. Therefore, no matter how
well the
business does, the lease rate never

changes.)
 There is less upfront cash outlay; lessee does not need to make large cash payments
for the
purchase of needed
equipment.
 Leasing better utilizes equipment; lessee leases and pays for equipment only for the
time he
needs it.
There is typically an option to buy equipment at end of lease

term.
 Lessee can keep upgrading; as new equipment becomes available he can

upgrade to the
latest models each time your lease

ends.
 Typically, it is easier to obtain lease financing than loans from commercial

lenders.
 Small upfront deposit and the option of a balloon
payment.
 Finance lease payments can be offset against tax. It offers potential tax benefits
depending
on how the lease is

structured
 User can decide when to cancel contract but will incur early termination
charges.
Limitation of Leasing:
 Restrictions on Use of Equipment A lease arrangement may impose certain
restrictions on use of the equipment, or require compulsory insurance, and so on.
Besides, the lessee is not free to make additions or alterations to the leased asset to suit
his requirement.  Limitations of Finance Lease A finance lease may entail higher
payout obligations, if the equipment is found not useful and the lessee opts for premature
termination of the lease agreement. Besides, the lessee is not entitled to the protection of
express or implied warranties since he is not the owner of the asset.  Loss of Residual
Value The lessee never becomes the owner of the leased asset. Thus, he is deprived of
the residual value of the asset and is not even entitled to any improvements done by the
lessee or caused by inflation or otherwise, such as appreciation in value of leasehold
land.  Consequences of Default If the lessee defaults in complying with any terms and
conditions of the lease contract, the lessor may terminate the lease and take over the
possession of the
leased asset. In case of finance lease, the lessee may be required to pay for damages
and accelerated rental payments.  Understatement of Lessee's Asset Since the
leased assets do not form part of the lessee's assets, there is an effective understatement
of his assets, which may sometimes lead to gross underestimation of the lessee.
However, there is now an accounting practice to disclose the leased assets by way of
footnote to the balance sheet.  Double Sales Tax With die amendment of sale tax laws
of various States, a lease financing transaction may be charged to sales tax twice—once
when the lessor purchases the equipment and again when it is leased to the lessee.
Problems of Leasing (Q: 2b,

2010)
Leasing has great potential in India. However, leasing in India faces serious handicaps which
may mar its growth in future. The following are some of the problems.
1. Unhealthy Competition:
The market for leasing has not grown with the same pace as the number of lessors. As a
result, there is over supply of lessors leading to competitor. With the leasing business
becoming more competitive, the margin of profit for lessors has dropped from four to five
percent to the present 2.5 to 3 percent. Bank subsidiaries and financial institutions have the
competitive edge over the private sector concerns because of cheap source of finance.
2. Lack of Qualified Personnel:
Leasing requires qualified and experienced people at the helm of its affairs. Leasing is a
specialized business and persons constituting its top management should have expertise in
accounting, finance, legal and decision areas. In India, the concept of leasing business is of
recent one and hence it is difficult to get right man to deal with leasing business. On account
of this, operations of leasing business are bound to suffer.
3. Tax Considerations:
Most people believe that lessees prefer leasing because of the tax benefits it offers. In reality,
it only transfers; the benefit i.e. the lessee‘s tax shelter is lessor‘s burden. The lease
becomes economically viable only when the transfer‘s effective tax rate is low. In addition,
taxes like sales tax, wealth tax, additional tax, surcharge etc. add to the cost of leasing. Thus
leasing becomes more expensive form of financing than conventional mode of finance such
as hire purchase.
4. Stamp Duty:
The states treat a leasing transaction as a sale for the purpose of making them eligible to
sales tax. On the contrary, for stamp duty, the transaction is treated as a pure lease
transaction. Accordingly a heavy stamp duty is levied on lease documents. This adds to the
burden of leasing industry.
5. Delayed Payment and Bad

Debts:
The problem of delayed payment of rents and bad debts add to the costs of lease. The lessor
does not take into consideration this aspect while fixing the rentals at the time of lease
agreement. These problems would disturb prospects of leasing business.
Uses of
Leases:
Leases are used for the rental (either short- or long-term) of homes and apartment
dwellings, as well as automobiles and other mechanical equipment. The purpose of the
lease is to spell out the lease costs, upfront deposits, maintenance, repair, insurance
coverage, use and how and when the lease will end. Leases spell out any future ownership
of the property when the lease ends, which could include a sale price in case the lessee is
buying the property or item at the end of the lease. They also will spell out legal
ramifications in the event the lessor or owner of the item or property does not keep
promises as agreed, and will spell out the coverage of court and legal costs in the event
that legal issues arise.
Leases on Real Estate: Leases are used in the rental of residential properties (including
apartments) to spell out the length of time a tenant will reside in the home and what happens
at the end of the lease period. A lease will spell out dates that rental fees are due, costs, late
charges and upfront deposits. It will also spell out the tenant's responsibility of maintenance
and upkeep (small repairs, grass cutting, etc.) and the owner's responsibility (major repairs
such as repair of heat and air systems, appliances and any items not required to be cared for
by the tenant). The lease will discuss what restrictions are placed on the property. It may
state that no drug use or similar illegal activity is to go on in the home or the lease will end
and the lessee will face eviction. The lease may cover the issue of pets and the number of
people in the household, as well as the number of people who may visit from time to time.
Commercial Leases: Leases are used for tenants who rent commercial properties. Space
may be rented by the square foot, set as a dollar amount per square foot of space. The
tenant may be offered one of three different types of lease:
The first is a gross lease, which mandates a set amount of rent to be paid each month. The
owner agrees to pay taxes, insurance and all maintenance on the building.
The second type of lease is a net lease, which requires the tenant pay an amount for the use
of the space (rent) plus some of the maintenance, insurance and other costs involved. The
third type of lease is a triple net lease. This is common for freestanding buildings, and has the
tenant paying rent plus all costs involved with the building including insurance and taxes.
Office Equipment leases: Leasing office or business equipment has its advantages. When
a new entrepreneur sets up a business, cash flow is usually low. Leasing is an option to
obtain needed
equipment but avoid going into debt with a loan. The business owner will spend a smaller
amount for deposits, and have only a monthly payment.
In the long run, equipment costs more when leased, but leasing has its advantages. An
example of this would be with computers. Computer technology has changed so much and
so often that computers become obsolete very quickly. A leased computer can offer the
advantage of upgrades as technology changes, guaranteed for no extra cost in the lease.
There is usually a clause to buy out the equipment at the end of the lease. Leasing can
become a necessity if you find that you cannot get a loan to buy equipment, and leasing or
buying with cash are your only options.
Leases on Automobiles: As the cost of new automobiles, vans, trucks and SUVs have
increased, so has the cost of the homes, food and energy it takes to live. Consumers are
always looking for ways to drive safe and dependable cars and keep all of the necessary
expenses within their budget. Automobile leasing can do that by keeping the lease payment
lower than an actual payment would be, because all you are paying for is the depreciation on
the vehicle, taxes and rent.
Automobile leases are considered to be closed-end leases because at the end of the lease,
you turn in the vehicle and walk away from the lease. You will be limited to a certain mileage
per year (typically 12,000 to 15,000 miles), or you can negotiate for higher mileage for a
higher monthly payment (which pays for increased depreciation of the vehicle's quality). You
have the option to buy the vehicle at the end of the lease period for a depreciated price, or to
select another new car and begin another lease period. Roughly 20 to 25 percent of all new
cars, trucks and SUVs are leased, but 75 percent of high-end luxury cars are leased vehicles.
Leasing cars, equipment, homes or anything else gives the user the use of the item or
property without a long-term obligation to purchase. It can save the lessee money on monthly
payments while giving him the opportunity to try out something for a time. The language in a
lease should give both the lessor and lessee an exit to break the lease in the event that
leasing the item or home no longer serves its purpose, or if either party can no longer
perform as initially agreed.
Economic Rationale for Leasing (Q: 1a,

2011)
The prime reason for the existence of leasing is that the companies, individuals and financial
institutions derive different tax benefits from the ownership of assets. The marginally
profitable company may not be able to reap the full benefits of accelerated depreciation,
whereas the high income Taxable Corporation or individual is able to realize such. The
former may be able to obtain a greater portion of the overall tax benefits by leasing the asset
from the latter party as opposed to buying it. Because of competition among lessors, part of
the tax benefits may be passed on to the lessee in the form of lower lease payments than
would otherwise be the case.
Another tax disparity has to do with the alternative minimum tax. For a company subject to
the AMT, accelerated depreciation is a ̳tax preference item‘, whereas a lease payment is not.
Such a company may prefer to lease, particularly from another party that pays taxes at higher
effective rate. The greater the divergence in abilities of various parties to realize the tax
benefits associated with owning an asset, the greater the attraction of lease financing overall.
It is not the existence of taxes per se that gives rise to leasing but divergences in the abilities
of various parties to realize the tax benefits.
Another consideration, although smaller one, is that lessors enjoy a somewhat superior
position in bankruptcy proceedings over what would be case if they were secured lenders.
The riskier the firm that seeks financing, the greater is the incentive for the supplier of capital
to make the arrangement a lease rather than a loan.
From the above discussion we can find out the following economic rationale for leasing in
brief:
 Leasing allows higher-income taxable companies to own equipment (lessor) and take
accelerated depreciation, while a marginally profitable company (lessee) would prefer the
advantages afforded by leases.  Thus, leases provide a means of shifting tax benefits
to companies that can fully utilize
those benefits.  Other non-tax issues: economies of scale in the purchase of assets;
different estimates of asset life, salvage value, or the opportunity cost of funds; and the
lessor‘s expertise in equipment selection and maintenance.
Financial Evaluation: Lessor’s

viewpoint
The lease evaluation from the point of view of the lessor aims at ascertaining whether to
accept a lease proposal or to choose from alternative proposals. As in the case of the
evaluation by a lessee, the appraisal method used is the discounted cash flow technique
based on the lessor's cash flows. The leaser related cash flow from his angle consists of (a)
outflows in terms of the initial investment/acquisition cost of the asset at the inception of the
lease; income tax on lease payments, sales tax on lease transaction, if any; lease
administration expenses such as rental collection charges, expenses on suits for recovery
and other direct cost, and so on, (b) inflows such as lease rentals, management fee, tax
shield on depreciation residual value and security deposit, if any, and so on. This section
illustrates lease evaluation from the point of view of a lessor and includes aspects such as
break-even rental for the lessor, negotiation and fixation of lease rentals.
Advantage of leasing from lessee’s viewpoint: (Q: 2b,
2011)
 Financing Benefits:
 The lease provides 100% financing, so the there is no down payment required.
 The lease contracts contain fewer restrictions and provisions making it more
flexible
than other debt agreements  The leasing arrangement creates a claim that is against
only the leased equipment
and not all assets.  Risk Benefit: The Lease may reduce the risk of
obsolescence and inadequacy.  Tax Benefit: By deducting lease payments, the lessee
can write off the full cost of the asset
including the part that relates to land.  Financial Reporting Benefit: In certain cases
(for operating leases), the lease does not add a liability to the lessee‘s balance sheet and
does not affect certain financial ratios such as rate of return.
 Billing Benefit: For certain contract-type work, leasing may permit the contractor to
charge more because the interest element contained in the rental payments is allowed as
a contract charge, whereas interest on borrowed money to purchase assets is usually not.
Advantages of Leasing form Lessor’s

Viewpoint
 A way of indirectly making a sale
 An alternative means of obtaining profit opportunity by engaging in a transaction that
enables the lessor company to transfer an asset by the lease
agreement.
How do I find a "standard" lease document? Unfortunately, there is
no such thing. To make matters worse, the terms and conditions of the lease and related
documents are getting to be at least as important as the amount of the lease payment itself.
Some leases are very lessor-friendly, some are more lessee-friendly, and some are rather
balanced between the interests of the two parties.
The terms and conditions can make a large difference to the economics and overall
desirability of a particular lease finance transaction. Sometimes this wide variety of terms
and conditions makes it very difficult to choose a lessor, since the decision usually involves a
certain amount of "apples to oranges" comparisons.
Prepared By Md.
com Mobile:
01198150195
Chapter 4 Accounting aspect of lease

financing
Accounting by Lessee
Operating Lease: An operating lease is a lease that does not meet any one of the four
Capitalization criteria Group I listed below. Under the Operating Lease method the Lessee
does not capitalize the asset, only a lease expense is recorded.
Capital Lease: In order the lessee to capitalize a lease it must be non-cancelable and meet
one of the following four requirements:
1. The lease transfers ownership to the lessee. 2. The lease contains a bargain purchase
option 3. The lease term is equal to 75% or more of the estimated economic life of the
leased
property. 4. The present value of the minimum lease payments (excluding executor
costs) equals or
exceeds 90% of the fair value of the leased property. If the lease is capital the
lessee records an asset and a liability equal to the sum of the present value at the beginning
of the lease term, of the minimum lease payments during the lease term.
Accounting by Lessor
From the standpoint of the Lessor, all leases may be classified for accounting purposes as
one of the following:
1. Operating Lease 2.
Direct Financing Lease 3.
Sales-Type Lease
Capitalization Criteria (Lessor) (Q: 2c,

2011)
Group I (Criteria Applicable to Both Lessee and Lessor “Column

A”)
1. The lease transfers ownership of the property to the lessee. 2. The lease contains a
bargain purchase option 3. The lease term is equal to 75% or more of the estimated
economic life of the leased
property. 4. The present value of the minimum lease payments (excluding executory
costs) equals or
exceeds 90% of the fair value of leased
property.
Group II (Criteria Applicable to Lessor Only “Column

B”)
1. Collectibility of the payments required from the lessee is reasonably predictable 2. No
important uncertainties surround the amount of unreimbursable costs yet to be incurred
by the lessor under the lease (lessor‘s performance is substantially complete or future
costs are reasonably predictable.
If at the date of the lease agreement the lessor is party to a lease the meets one or more
of the Group I requirements and both of the Group II criteria, the lessor shall classify the
lease as a direct financing lease or a sales type lease.
From this point, if the lease include manufacturer’s or dealer’s profit (loss) it is
considered to be a sales-type lease. If it does not it is considered a direct financing
lease.
All leases that do not qualify as a direct financing or sales-type lease are classified as an
operating lease.
Operating Lease
(Lessor)
 Under and operating lease, a lessor company leasing an asset to a lessee retains
substantially all
the risks and benefits of ownership.  Rental
receipts are recorded as rental revenue.
 The leased asset is depreciated in the normal manner and the expense of the period is
matched
against rental revenue.
Direct Financing Leases

(Lessor)
 The net amount at which the lessor records the receivable must be equal to the cost of
carrying value the property.  Then net receivable is equal to the present value of the
future lease payments to be received.  There are two components of the net receivable,
gross receivable and the unearned interest.  The gross receivable of the lessor includes
the lessor includes the sum of:
 The undiscounted minimum lease payments to be received by the lessor (net of
executory cost paid by the lessor) plus  The unguaranteed residual value accruing to
the benefit of the lessor.  The interest rate implicit in the lease is the rate that, when
applied to the gross receivable,
will discount that amount to a present value that is equal to the net
receivable.
Initial Direct Cost Involved in a Direct Financing Lease of a completed lease transaction
include incremental direct cost and certain other direct costs. Incremental direct costs include
those cost that result directly from and are essential to the leasing transaction and would not
have been incurred by the lessor if the transaction had not occurred.
Sales-Type Leases (Lessor) (Q: 5a,

2010)
 In distinguishing between a sales-type lease and a direct financing lease, the

major
differences are the presence of a manufacturer‘s or dealer‘s profit or loss in a
sale-type lease and the accounting for initial direct costs.
 The manufacturer‘s profit of loss is measured as the difference between the following
two
items:
 The present value of the minimum lease payments (net of executory costs)
computed at
the interest rate implicit in the lease  The cost or the carrying value of the asset
plus any initial direct costs less the present
value of the unguaranteed residual value accruing to the benefit of the
lessor.
Are there accounting benefits to

leasing?
The biggest benefit is the ability to get certain leases off the balance sheet by virtue of
compliance
with the FASB 13 tests. Such lease obligations are typically not on a firm's Balance Sheet
but are
listed in the footnote section of the financials. This treatment can not only improve financial
ratios,
but other performance criteria such as Return on Assets,
etc.
For most high technology assets, a lease also tends to avoid future accounting surprises
that can
result when purchased assets are sold for less than their current book value. In other words,
leasing
high technology equipment tends to track with real costs / market values better
than the
depreciation tables, which were set up many years ago. This is even true when
accelerated
depreciation such as MACRS is

used.
'Off' the balance sheet Financing: (Q: 1c,

2011)
Leasing has the advantage of being 'off' the balance sheet. In the case of operating leases,
future rental payments are currently not included on the balance sheet of the lessee as a
liability and the leased asset is not included as an asset. Operating leases differ from Finance
leases in that the lessor enjoys the benefits and shoulders the risk of ownership while the
lessee has possession and use of the leased asset. The lessee does not guarantee the
residual value and returns the asset to the lessor at the end of the lease period.
Insight: some businesses consider operating leases to be advantageous, especially if the

efficiency of their operation is measured by reference to return on assets. However, it should
be noted that future rentals do need to be disclosed by way of a note in the financial
accounts.
Prepared By Md.
com Mobile:
01198150195
Mathematical Problems and Solutions
Math 1: Basket Wonders is deciding between leasing a new machine or purchasing the
machine outright. The equipment, which manufactures Easter baskets, costs $74000
and can be leased over 7 years with payments being made at the beginning of the each
year. The lessor calculates the lease payments based on an expected return of 11%
over the 7 years. The lease is a net lease. The company is in 40 % marginal tax
bracket. If bought, the equipment is expected to have a final Salvage value of $7500.
The purchase of the equipment will result in depreciation schedule of 20%, 32%, 19.2%,
11.52%, 11.52%, 5.76% for the first 6 years (5 year property class) based on $74000
depreciable base. Loan payments are based on a 12% loan with payments occurring at
the beginning of each period. (Math of exam 2011)
Solution of math 1
Cost of the equipment = $74000
Useful life = 7 years
Tax bracket = 40%
Salvage value = $7500
 Lease payments will be made at the beginning of the each year.  Lease payments
will be calculated basing on an expected return of 11%.  Depreciation rates basing on
$74000 depreciable base 20%, 32%, 19.2%, 11.52%, 11.52%,
5.76%.  Loan payments are based on a 12% loan with payments occurring at the
beginning of each
period.
Cost of capital = 12% (1-.40)
= 7.2%
Lease payment for each year = 1− 1+.11 74000

−7 1+.11
.11
= $14148
NPV Analysis of Leasing:
Year Lease Rent Tax Savings COAT PV of COAT at 7.2%
0 $14148 $0 $14148 $14148 1 $14148 $5659 $8489 $7919 2 $14148 $5659 $8489
$7387 3 $14148 $5659 $8489 $6891 4 $14148 $5659 $8489 $6428 5 $14148 $5659
$8489 $5996 6 $14148 $5659 $8489 $5594 7 $7500 $5659 (1841) $1132
NPV = $55495 Installment of loan = 1− 1+.12 74000

−7 1+.12
.12
= $14477 Jagannath University Department of Finance Md. Mazharul Islam Jony 23 | Page
Loan Repayment Schedule:
Year Beginning Balance Installment Interest Amortization Ending Balance 0 74000

14477 ....... 14477 59523 1 59523 14477 7143 7335 52188 2 52188 14477 6263 8215
43973 3 43973 14477 5277 9201 34772 4 34772 14477 4173 10305 24468 5 24468
14477 2936 11541 12926 6 12926 14477 1551 12926 0
Depreciation and tax savings

schedule:
Year Interest Depreciation Total Tax Savings 0 ......... ........... ............ .......... 1
$7143 $14800 $21943 $8777 2 6263 $23680 $29943 $11977 3 5277 $14208
$19485 $7794 4 4173 $8525 $12698 $5079 5 2936 $8525 $11461 $4585 6 1551
$4262 $5813 $2325 7 ........... ......... .......... ...........
NPV Analysis of Owing:
Year Installment – Tax Savings COAT PV of COAT at 7.2%

0 $14477 - $0 $14477 $14477 1 $14477 - $8777 $5700 $5317 2 $14477 -
$11977 $2500 $2175 3 $14477 - $7794 $6683 $5425 4 $14477 - $5079
$9398 $7116 5 $14477 - $4585 $9892 $6987 6 $14477 - $2325 $12152
$8008 7 $0 - $0 .......... .......... Total = $49505 Less: PV of Salvage Value =
(4610) NPV = $44895
Decision: Considering above NPVs of two alternatives, we can say that Company should
borrow and buy the machine as NPV of buying is less than that of taking lease.
Math 2: A company has decided to acquire an asset costing Tk. 260000. The asset has
a useful life of 6 years, at the end of which a salvage value of Tk. 35000 is expected.
The company is trying to determine whether it is better to finance the asset with debt or
with lease financing. If debt, the interest rate would be 15 percent, and the debt
payment would be due at the very beginning of each of the 6 years. The company is in
40 % tax bracket. If the asset is acquired through lease financing, lease payments of Tk.
50000 would be required at the beginning of each year for the lease periods. Show your
analysis to recommend the method of financing which the company would prefer for
acquiring the asset.(Math of exam 2010)
Solution of math 2
Cost of the equipment = $260000
Useful life = 6 years
Tax bracket = 40%
Salvage value = $35000
 Lease payments will be made at the beginning of the each year.  Lease payments
per year $50000.  Depreciation will be calculated on a straight line basis for 6 years.
 Loan payments are based on a 15% loan with payments occurring at the beginning
of each
period.
= 9%
Year Lease Rent Tax Savings COAT PV of COAT at 9%
0 $50000 .......... $50000 $50000 1 $50000 $20000 $30000 $27523 2 $50000 $20000
$30000 $25250 3 $50000 $20000 $30000 $23165 4 $50000 $20000 $30000 $21253 5
$50000 $20000 $30000 $19498 6 .......... $20000 ($20000) ($11925) NPV = $154764
Installment of loan = 1− 1+.15 260000

−6 1+.15
.15
= $59740
Year Beginning Balance Installment Interest Amortization Ending Balance
0 $260000 $59740 ....... $59740 $200260 1 $200260 $59740 $30039 $29702 $170558
2 $170558 $59740 $25584 $34157 $136401 3 $136401 $59740 $20460 $39280
$97121 4 $97121 $59740 $14568 $45172 $51948 5 $51948 $59740 $7792 $51948 $0
Depreciation Per Year = $260000−$35000

= $37500
6
Depreciation and tax savings schedule:

Year Interest Depreciation Total Tax Savings 0 ....... ........... ............ .......... 1 $30039
$37500 $67539 $27016 2 $25584 $37500 $63084 $25234 3 $20460 $37500 $57960
$23184 4 $14568 $37500 $52068 $20827 5 $7792 $37500 $45292 $18117 6 .......
$37500 $37500 $15000
Year Installment – Tax Savings COAT PV of COAT at 9%
0 $59740 - $0 $59740 $59740 1 $59740 - $27016 $32734 $30008 2 $59740 - $25234
$34506 $29054 3 $59740 - $23184 $36556 $28221 4 $59740 - $20827 $38913 $27550
5 $59740 - $18117 $41623 $27055 6 $0 - $15000 ($15000) ($8940) Total = $192688
Less: PV of Salvage Value = (20869) NPV = $171818
Decision: Considering above NPVs of two alternatives, we can say that Company
should take lease the machine as NPV of taking lease is less than that of borrowing and
buying.
Math 3: Lease versus

purchase:
The Hot Bagel Shop wishes to evaluate two plans, leasing and borrowing to
purchase for financing an oven. The firm is in the 40% tax bracket.
Lease alternative: the shop can lease the oven under a 5 year lease requiring annual
end of year payments of $6000. All maintenance costs are borne by lessor and
insurance and other costs will be borne by the lessee. The lessee will exercise its
option to purchase the asset for $4000 at termination of the lease.
Purchase alternative: the oven costs $24000 and will have a 5 year life. It will be
depreciated under MACRS of 5 year recovery period. The total purchase price will be
financed by a 5 year, 9% loan requiring equal annual year end payments of $6170.
The firm will pay $1500 for a service contract that covers all maintenance costs,
insurance and other costs will be borne by the firm. The firm plans to keep the
equipment and use it beyond its 5 year recovery period.
a. For the leasing plan calculate the following: 1) The after tax
cash outflow each year. 2) The present values of cash outflows
using 6% discount rate. b. For the purchasing plan calculate the
following:
1) The annual interest expense for each year 2) Annual after tax cash
outflow resulting from the purchase for each of the 5
years. 3) The present values of cash outflows using 6% discount rate. c. Compare
the present values of the cash outflow streams for these two plans and
determine which plan would be preferable. (Math of exam
2012)
Solution of Math 3:
Given, cost of the machine =
$24000 Tax bracket = 40% Cost of
capital = 6%
Lease alternative:  Every year end lease payments =

$6000  Lease term = 5 years  Lessee can purchase
for $4000 at the end of lease term.  All maintenance
costs are borne by lessor.
Purchase alternative:  9%, 5year loan with installments of

$6170 at the end of each year.  Maintenance cost = 1500 per
year.  Depreciation rates are 20%, 32%, 19%, 12% and 12%
respectively.
After tax cash outflow of lease = lease rental ( 1- tax rate)
= $6000(1- 0.40) = $3600 NPV Analysis of Leasing:
Year COAT PV of COAT at 6%
1 $ 3600 $3396 2 $ 3600 $3204 3 $3600 $3023 4 $ 3600 $2852 5 $ 3600+ $4000 $5679
Total = $18154
Loan Repayment Schedule: Year Beginning Balance Installment Interest
Amortization Ending Balance
1 24000 6170 2160 4010 19990 2 19990 6170 1799 4371 15619 3 15619 6170
1405 4765 10854 4 10854 6170 977 5194 5660 5 5660 6170 510 5660 0
Year (1)
Interest (2)
Maintenance (3)
Depreciation (4)
Total (5)
Tax Savings (6)=(5)*40% 1 2160 1500 $4800 $8460 $3384 2 1799 1500 $7680
$10979 $4392 3 1405 1500 $4560 $7465 $2986 4 977 1500 $2880 $5357 $2143
5 510 1500 $2880 $4890 $1956
Year (1)
Installment (2)
Maintenance (3)
Tax Savings (4)
COAT (5)= (2)+(3)-(4)
PV of COAT at 6%
1 6170 1500 $3384 $4286 $4043 2 6170 1500 $4392 $3278 $2917 3 6170 1500
$2986 $4684 $3933 4 6170 1500 $2143 $5527 $4378 5 6170 1500 $1956 $5714
$4270
Total = $19541
Decision: Considering above NPVs of two alternatives, we can say that
Company should take lease the machine as NPV of taking lease is less than that
of borrowing and buying.
Math 4: Lease versus

purchase:
The Hot Bagel Shop wishes to evaluate two plans, leasing and borrowing to
purchase for financing an oven. The firm is in the 40% tax bracket.
Lease alternative: the shop can lease the oven under a 5 year lease requiring annual
end of year payments of $5000. All maintenance costs are borne by lessor and
insurance and other costs will be borne by the lessee. The lessee will exercise its
option to purchase the asset for $4000 at termination of the lease.
Purchase alternative: the oven costs $20000 and will have a 5 year life. It will be
depreciated under MACRS of 5 year recovery period. The total purchase price will be
financed by a 5 year, 15% loan requiring equal annual year end payments of $5967.
The firm will pay $1000 for a service contract that covers all maintenance costs,
insurance and other costs will be borne by the firm. The firm plans to keep the
equipment and use it beyond its 5 year recovery period.
d. For the leasing plan calculate the following: 3) The after tax
cash outflow each year. 4) The present values of cash outflows
using 9% discount rate. e. For the purchasing plan calculate the
following:
4) The annual interest expense for each year 5) Annual after tax cash
outflow resulting from the purchase for each of the 5
years. 6) The present values of cash outflows using 9% discount rate. f. Compare
the present values of the cash outflow streams for these two plans and
determine which plan would be
preferable.
Solution of Math 4:
 Given, cost of the machine =

$20000  Tax bracket = 40%  Cost
of capital = 9%
Lease alternative:
 Every year end lease payments = $5000  Lease

term = 5 years  Lessee can purchase for $4000 at the
end of lease term.  All maintenance costs are borne
by lessor.
Purchase alternative:
 15%, 5year loan with installments of $5967 at the end of each

year.  Maintenance cost = 1000 per year.  Depreciation rates
are 20%, 32%, 19%, 12% and 12% respectively.
After tax cash outflow of lease = lease rental ( 1- tax rate)
= $5000(1- 0.40)
= $3000
Year COAT PV of COAT at 6%
1 $ 3000 $2752 2 $ 3000 $2525 3 $3000 $2317 4 $ 3000 $2125 5 $3000+ $4000 $4550
Total = $14269 Loan Repayment Schedule:
Year Beginning Balance Installment Interest Amortization Ending Balance
1 20000 5967 3000 2967 17033 2 17033 5967 2555 3412 13621 3 13621 5967
2043 3924 9697 4 9697 5967 1455 4512 5185 5 5185 5967 778 5189 -4
Year (1)
Interest (2)
Maintenance (3)
Depreciation (4)
Total (5)
Tax Savings (6)=(5)*40% 1 3000 1000 $4000 $8000 $3200 2 2555 1000 $6400
$9955 $3982 3 2043 1000 $3800 $6843 $2737 4 1455 1000 $2400 $4855 $1942
5 778 1000 $2400 $4178 $1671 NPV Analysis of Owing:
Year (1)
Installment (2)
Maintenance (3)
Tax Savings (4)
COAT (5)= (2)+(3)-(4)
PV of COAT at 6%
1 5967 1000 $3200 $3767 $3456 2 5967 1000 $3982 $2985 $2512 3 5967 1000
$2737 $4230 $3266 4 5967 1000 $1942 $5025 $3560 5 5967 1000 $1671 $5296
$3442
Total = $16237
Decision: Considering above NPVs of two alternatives, we can say that
Company should take lease the oven as NPV of taking lease is less than that of
borrowing and buying. Leasing rather than purchasing the oven should result in
an incremental savings of $1968.
Math 5: U.S. Bilvet wishes to acquire a $100000 bilvet-degreasing machine,
which has a useful life of 8 years. At the end of this time, the machine‘s scrap
value will be $8000. The asset falls into 5 years property class for cost recovery
(depreciation) purposes. The company use either lease or debt financing. Lease
payments of $16000 at the beginning of each year for the lease periods would be
required. If debt financed, the interest rate would be 14 percent, and the debt
payment would be due at the beginning of each of the 8 years. The company is in
40 % tax bracket. Which method of financing has the lower present value of cash
outflows?
Solution of Math 5:
 Cost of the equipment = $100000  Useful life = 8 years  Tax bracket =
40%  Salvage value = $8000  Lease payments will be made at the beginning
of the each year.  Lease payments per year $16000.  Depreciation rates are
20%, 32%, 19%, 12% 12% and 5% respectively.  Loan payments are based on
a 14% loan with payments occurring at the beginning
of each period.
= 8.4%
Year Lease Rent Tax Savings COAT PV of COAT at 8.4%
0 $16000 .......... $16000 $16000 1 $16000 ($6400) $9600 $8856 2 $16000
($6400) $9600 $8170 3 $16000 ($6400) $9600 $7537 4 $16000 ($6400) $9600
$6953 5 $16000 ($6400) $9600 $6414 6 $16000 ($6400) $9600 $5917 7 $16000
($6400) $9600 $5458 8 ........... ($6400) ($6400) ($3357) NPV = $61948
Installment of loan = 1− 1+.14 100000

−8 1+.14
.14
= $18910
Year Beginning Balance Installment Interest Amortization Ending Balance 0

$100000 $18910 ....... $18910 $81090 1 $81090 $18910 $11353 $7557 $73533 2
$73533 $18910 $10295 $8615 $64918 3 $64918 $18910 $9089 $9821 $55097 4
$55097 $18910 $7714 $11196 $43895 5 $43895 $18910 $6145 $12765 $31130 6
$31130 $18910 $4358 $14552 $16578 7 $16578 $18910 $2321 $16589 -$11
Depreciation and tax savings

schedule:
Year Interest Depreciation Total Tax Savings 1 $11353 $20000 $31353

$12541 2 $10295 $32000 $42295 $16918 3 $9089 $19000 $28089 $11236 4
$7714 $12000 $19714 $7886 5 $6145 $12000 $18145 $7258 6 $4358 $5000
$9358 $3743 7 $2321 .......... $2321 $928
Year Installment – Tax Savings COAT PV of COAT at 8.4% 0 $18910 - $0

$18910 $18910 1 $18910- $12541 $6369 $5875 2 $18910 - $16918 $1992
$1695 3 $18910 - $11236 $7674 $6025 4 $18910- $7886 $11024 $7984 5
$18910 - $7258 $11652 $7785 6 $18910- $3743 $15167 $9348 7 $18910 -
$928 $17982 $10224 Total = $73846 Less: PV of Salvage Value = ($4196)
NPV = $69650
Decision: Considering above NPVs of two alternatives, we can say that Company
should take lease the machine as NPV of taking lease is less than that of borrowing
and buying.
Chapter 5 Tax aspects of

leasing
When is leasing advantageous from a tax viewpoint? (Q: 5c,

2010)
Since the lessor purchases the asset and turns around and leases it to the lessee, the
evaluation of the lease from the point of view of the lessor is exactly the same as from the
lessee's point of view, except that the signs of the cash flows are switched around.
If the tax rates for lessor and lessee were the same, it follows that the gain to the lessee from
leasing would equal the loss to the lessor. Hence for leasing to make sense economically,
there must be some asymmetries between lessor and lessee.
The lease made sense when the lessor had a lower tax rate. However, in general, where
accelerated depreciation is allowed for tax purposes, it may be more advantageous for the
party with the higher tax rate to be the lessor, who can use the depreciation tax deduction.
In general, if the lessor's tax rate is higher, it would be optimal for depreciation to be
accelerated and for lease payments to be concentrated towards the end of the lease.
If the lessee's tax rate is higher, the reverse would be
optimal.
In both cases, the advantage to leasing is greater, the greater the interest rate--with a zero
interest rate, there would be no advantage to postponing the payment of taxes.
Post tax evaluation from lessee

viewpoint
 Lessor‘s tax benefit is the lessee‘s tax loss and vice versa  Tax loss to the lessee:
depreciation  Tax gain to the lessee: principal repayment embedded in lease payments
 So net lessee gain: (PV of prn repayment – PV of depreciation)* tax rate = A  There
is nothing like a mutually beneficial transaction  So, to compute effective post-tax cost
to the lessee, lessee‘s IRR should be obtained by
equating (asset cost – A) with lease
rentals.
Prepared By Md.
com Mobile:
01198150195
Chapter 6: Equipment lease
financing
A lease is in essence an extended rental agreement wherein the owner of the equipment
(the lessor) allows the user (the lessee) to operate or otherwise make use of the equipment
in exchange for periodic lease payments. "There are a number of reasons that companies
sometimes prefer to lease equipment rather than buying it," said Richard A. Brealey and
Stewart C. Myers in Principles of Corporate Finance.
For example, there may be good tax reasons. If the operator cannot use the depreciation tax
shield, it makes sense to sell the equipment to someone who can. Also, the lessor may be
better able to bear the risk of obsolescence, or be in a better position to resell secondhand
assets. The lessor may be able to offer a very good deal on maintenance. Finally, it may be
much less costly in time and effort to arrange a simple lease contract on a standard item of
equipment than to arrange a normal loan.
Equipment Loans and

leases:
All businesses need equipment, machinery and tools as well as other business or office
equipment in the operation of their company.
Equipment can include large items like dry cleaning washers, construction backhoes and
tractors, and CNC routing machines to office equipment like copy machines, fax machines,
and computer and server hardware and software.
Businesses have several options in purchasing needed

equipment.
First, businesses can use their cash on hand to purchase the equipment out right. While this
provides several benefits in overall equipment costs, it also uses necessary business capital
that can be used for other revenue growth opportunities like increasing sales and profits.
Second, companies can get an equipment loan - from a bank, financial institution, or
other non- bank lender to purchase the equipment. This requires lower amounts of cash
out of pocket but means regular monthly payments and interest charges as well as
possible upfront fees.
Third, businesses can lease the equipment. Leasing could mean no out of pocket
expenses, tax benefits just like the other two options above and 100% financing including
shipping and set up.
Although each business loan / equipment loan option above has its pros and cons, it is
always best to leverage current cash flow to purchase an asset to be used in business -
then let that assets, through your operations, pay for itself.
What this means is obtaining an equipment loan or equipment lease based on your
business's current cash flow - purchase the equipment with little or no upfront cash (cash
that can be used to grow the business) - then use the equipment to generate more,
profitable business.
In this type of scenario, the business uses very little of its capital on hand but still gets the
equipment needed to grow sales and operate the business. Mostly, this type of scenario
allows the business to use the equipment it is paying for to pay for itself through increased
business or better profits.
Equipment Loan:
With an equipment loan, some banks, financial institutions, or other lenders will finance
(provide an equipment loan or lease) up to 100% of the purchase price - not including
shipping, taxes and installation cost. However, most will lend on a minimum
loan-to-value (LTV) of say 80% to 90% of the appraised (if used) or purchase price (if
new) and require significant cash flow to cover the P & I payments.
However, paying 20% for a piece of business equipment is much better than paying
100% for the equipment, especially since the equipment itself could pay for the
remaining 80% - saving the business' capital for other opportunities.
Equipment Lease:
An equipment lease is great way for growing businesses to acquire the equipment or
machinery they need without paying the full purchase price up front.
Thus, the equipment can be used in the operation of the business; allowing the
business to generate additional revenue from the use of the equipment, without having
to waste needed capital - letting the equipment pay for itself.
Further, some businesses may not qualify for an equipment loan but will qualify for an
equipment lease.
When traditional equipment loans are out of the question, new or growing businesses
can often find what they need with an equipment lease.
Leasing offers many, unique benefits to business owners - especially for businesses
with limited cash flow.
Equipment Leasing Versus Equipment Loans
Equipment Lease Equipment Loan Requires a significant downpayment?
No Yes
Secured with collateral?
No. The equipment itself is collateral.
Yes. Additional assets are often required. Who bears the risk of equipment
obsolescence?
The lessor The end-user
Can claim tax deductions?
The entire lease payment can be claimed under most types of leases
The end-user may claim tax deductions for depreciation and interest. Recorded on the
balance sheet?
With an operating lease, the equipment does not appear as an asset.
Equipment is recorded as an asset and liability.
Effect on cash flow? Lease payments are generally
spread out comfortably over time
The initial downpayment and strict repayment schedule can put a strain on cash flow.
ELEMENTS OF EQUIPMENT LEASING CONTRACTS
Writing in The Entrepreneur and Small Business Problem Solver, William A. Cohen
delineated ten major terms of most equipment leasing contracts:
 Durationof the lease  Total rate or lease payment due the lessor  Specific financial
terms (date of the month that payment is due, penalties for late payment,
etc.)  Residual values and purchase options  Market value of equipment
(necessary for insurance purposes in the event of lost or
damaged equipment)  Tax responsibility 
Equipment updating or cancellation provisions 
Lessee renewal options  Penalties for early
cancellation without good cause  Miscellaneous
options (security deposits, warranties)
Advantages of an Equipment
Lease:
 These business loans have lower upfront costs. No down payments or up front
fees and
usually 100% financing.  100% includes the purchase price, shipping, taxes, and
installation.  Leasing payments can be lower than finance payments as a business
can lease or finance a small portion of the equipment - not the full purchase price (does
not amortize the residual value).  Some equipment lease agreements provide lessees
with cancellation options in the event that the equipment proves inadequate for the
company's needs over the course of the agreement. Upgrades are sometimes available
through these options. One vital category of equipment that often includes such an
option is computer systems.  Equipment Leasing shifts risks to the lessor if the
equipment looses value over time.
Leasing can provide more flexibility to businesses who expects to grow over the
immediate short-term. As the business grows, its equipment needs will grow. Thus, the
business is not stuck with an asset that has no value to the business yet it is still paying
for.  Lease payments are considered business expenses, which can be set off against
revenue
when calculating tax payments.
Types of Equipment
Leases:
Finance Lease - also termed capital lease - allows a business to finance the equipment
without actually taking ownership of the asset. The business has control over the asset,
its benefits and risks, but may not actually own the equipment until the end of the lease.
The term of the lease is usually tied to the useful life or close to the useful life of the
asset. Think rent to own.
Operating Lease - A lease where the term is much shorter than the useful life of the asset
being leased. The business can acquire the asset for a short period, to be used in the
business, then given back to the lessor. The remaining or residual value is held by the
lessor.
Sale Lease Back - Let's not forget that business that already own equipment but need
working capital for their businesses, can sell their equipment to a financing or leasing
company for cash
(cash that can be used in the business) then lease that equipment back from the leasing
company at fixed monthly payment (just like a loan). Remember, this is a paper transaction -
you don't have to take the equipment to the finance company. Sale lease backs are great
ways to improve the cash flow of any business.
Why choose equipment lease

financing?
Equipment lease is a favored option mainly due to the ease of access to lease contracts at
competitive monthly rentals from reputed leasing companies. The other reasons that
contribute to the popularity of this mode of equipment finance are:
 Equipment lease is available for a wide variety of business needs ranging from:
software,
furniture, industrial equipment, office technology, professional equipment, telecom
equipment, security equipment and others.  Monthly rentals are considered as
an expense while a loan for purchasing business
equipment is recorded as a debt; this is an important consideration for companies‘
balance sheet.  Tax deductible monthly rentals on leased equipment imply savings as
compared to
purchasing and owning equipment wherein only the interest paid for purchasing the
equipment is eligible for a tax deduction.  Investments in assets lock capital for small
businesses leaving less capital to take advantage
of new opportunities or market changes; leasing prevents locking of capital. Money
saved from investing in expensive machinery by leasing can be utilized for other
Leasing equipment helps safeguard interests of
important business expenditures. 
businesses with constant change in
technology or obsolescence. Investment in obsolete technology can turn into a liability
while leasing can protect business interests as companies only have to abide to the
lease contract for the specified period.  Flexible payment options are offered by both
banks as well as leasing companies. Some
such options include: fixed payments, level payments and annual payments. 
Leasing companies may also finance deals for used equipments with small or no
upfront
costs.
It is important to note that leasing equipment may not necessarily cover ―soft costs‖.
Soft costs in equipment leasing parlance are all costs associated with setting up the
equipment such as: installation, maintenance, service, training, shipping, software etc.
A business must evaluate the importance of such services and the additional costs the
business may need to shell out for such services.
Prepared By Md.
com Mobile:
01198150195
The various equipment lease payment

options
Just as there are different types of equipment leasing schemes, so are there a number of
payment options available.
Some of the popular lease payment options

are:
 Standard lease: As the name suggests, this payment option is amongst the most
common and requires upfront payment of the first and last installment while maintaining a
level monthly installment scheme throughout the term of the lease. Such terms range
between a repayment period of two to five years and also provide various end-of-term
buyout options.  Step lease: In this case, the payments scale from low to a normal
amount. This type of
payment option is best suitable for equipment costing more than $50,000. Step lease
also provides various end-of-term buyout options.  Skip lease: The skip lease
payment option is designed to ensure that payments are made
only during certain months in a calendar year. This payment option is most suitable for
businesses having seasonal highs or those that are more cyclical in nature. 
Deferred lease: In the case of a deferred lease, the payments are deferred to a set
period
such that you have enough time to generate income by using the leased
equipment and ensure payment of the lease rental.
Most of the above payment options provide end of term buy out options. Obviously, there are
advantages and disadvantages of each of the above repayment options depending on the
nature of the business, the quantum of the financing availed, the projected returns from the
business (and more specifically, the equipment being leased). Therefore, it is very important
to analyze the various payment options in the context of one‘s business and income
generation strategy and potential.
Simple tips on equipment

leasing
Here are some important tips to ensure leasing equipment is a profitable

decision:
• Get
quotes directly: It is important to note that very often equipment leasing
companies are referred through lease financiers. It is advisable to get a quote from the
company selling the lease directly. Dealing with leasing companies directly help save on
broker fees and other costs associated with completing the lease formalities.
• Make apples-to-apples comparison: Compare quotes closely from the various
providers so that you get a profitable deal. While you may get several quotes, note the
exact terms of the deal, the type of lease, the repayment options and any other service
conditions. Very often, the devil is in the details. Before deciding that one deal is better
than the other, make sure you are making an apples-to-apples comparison.
• Evaluate qualitative attributes and seek external inputs: Referrals from business
associates or friends are good sources to locate a reliable and reasonable equipment
leasing firm. Known sources or referrals also help gauge qualitative attributes such as
customer service much better. Choose a leasing firm that qualifies on the grounds of
good experience, reputation, knowledge, ability to deliver, service and relationship
building approach.
• Beclear about implications of a lease contract: Choose the right lease program
taking into account the lease pricing, lease flexibility, balance sheet considerations,
equipment obsolescence, the anticipated period of equipment usage, and your firm‘s
credit status.
• Understand the lease and fees structure: Evaluate and understand the fees
associated with equipment leasing very carefully before entering into a contract.
Commitment fees, non-use fees or facility fees, per schedule documentation charges,
attorney fees, UCC financing statements, penalty charges for late rental payments and
early lease termination charges are some fees associated with lease rentals--- getting
a clear idea of what kind of payments you will be liable to make is very important.
• Negotiate
reduction in interim rent: This type of rent is payable from the day
of equipment acceptance to the start date of the lease.
• Avoidunintended renewals and lease charges: It is advisable to keep the end of

lease notice and renewal periods short to avoid automatic renewal and unintended lease
charges. Such periods usually range from one to six months.
FINDING A Equipment Leasing

Company
Business consultants and long-time equipment lessees agree that leasing companies vary
considerably in terms of product quality, leasing terms, and customer service. Small business
owners should approach a number of lease companies if possible to inquire about lease
terms. They should then carefully study the terms of each outfit's lease agreements, and
check into the reputation of each company (present and former customers and agencies like
the Better Business Bureau can be helpful in this regard).
Finally, it is also important for entrepreneurs and business owners to take today's
fast-changing technology into account when considering an equipment leasing arrangement.
"Because rapidly changing technology can cause an asset to become obsolete before it
wears out or the lease expires, you will want to be sure the provisions of your lease permit
exchanges for more advanced equipment or replacements, as they become necessary,"
stated Borow.
Unplanned obsolescence All equipment is subject to either functional or

technical obsolescence (or both). Functional obsolescence means that the equipment simply
wears out over time or loses structural integrity. Technological obsolescence means that
there is something new and improved in the market that renders the older technology less
desirable. The desktop computer you bought five years ago is still just as fast as it was when
it came out of the box, but is now essentially useless for most real-world business
applications and therefore worthless in the used equipment marketplace.
Chapter 7 Sale and lease back in

real estate
Introduction:
A sale/leaseback transaction occurs upon the sale of property by the owner and a lease of
the property back to the seller. In these transactions, the "seller" is often referred to as the
seller/lessee and the "buyer" is often referred to as the buyer/lessor. Sale/leaseback
transactions typically are entered into as a means of financing, for tax reasons or both. In
addition, if a property owner has accumulated significant equity in a property, a
sale/leaseback transaction provides a way to realize the equity without giving up the use of
the property.
In recent years, due to low interest rates and the supply of real estate debt financing, there
has been an emphasis away from the sale/leaseback transaction as an affordable method for
the restaurant operator to proceed with development and financing transactions or access
equity and capital. Sale and leaseback transactions have, however, been used in commercial
real estate for many years, and, due to the underlying real property asset represent a
traditional means of financing. Notwithstanding the cyclical nature of real estate and
occasional over influence on the market by outside factors (e.g., the real estate tax shelters
of the early 1980's), lenders and investors have enjoyed appropriate returns on real estate
using sale/leaseback transactions. As the current interest rate market stabilizes and debt
financing in the restaurant industry returns to more traditional levels, it is likely that the rates
offered on sale/leaseback transactions will again appear attractive.
The actual sale/leaseback transaction has been streamlined by a number of financing

sources in the restaurant industry. Financing through the use of a sale/leaseback can be
used for existing properties in connection with takeout of construction loans, refinancing or
accessing equity in real estate. Sale/leaseback transactions can also be structured for
development of new restaurants.
Sale And
Leaseback
How you can raise finance against equipment you own or spread the payments for new
items.
Lease purchase works quite similarly to equipment leasing in that it allows you to buy high
grade equipment - possibly in quantities or at levels of quality which you couldn't otherwise
afford - and spread the payments over the lifetime of the item.
As with equipment leasing, lease purchase agreements can also be drawn up against used
the equipment and so they can be used to raise funds against the value of assets you
already own. Essentially, you sell them to the lease company and buy them back. Clearly this
is an excellent way of freeing up the value of assets and reducing the strain purchasing
might place on capital.
At the end of the terms of the lease, which can run for anything from one year to seven,
ownership of the equipment or property is transferred (or reverts) to you.
Why sell and

leaseback?
If you have the right kind of assets the advantages it brings are the ability to upgrade
resources for your business and staff without making too large an impact on your capital. In
this respect it is much like leasing but at the end of the contract the item belongs to your
business out right.
How does it work?
The equipment or asset is sold to a leasing company. Then, the lessor, will then produce a
finance document and lease the same equipment back you, the original owner or intended
buyer, the lessee.
You can use lease purchase for the acquisition of equipment, property (land and buildings)
or even entire businesses as part of the purchasing financing.
So, for example, if you are buying a business and sufficient closing funds are not
obtainable through normal borrowing channels, unused plant, equipment or vehicles can
be sold to a leasing company and then leased back through a normal leasing agreement
over a period of time. The capital produced from this exercise can be given to the original
seller of the business to make up the final purchase price.
Sale/leaseback transactions can be broken down into two general structures. The first would
be the sale/leaseback of improved land and the second would be the sale/leaseback of
unimproved land. With regard to the first, sale/leaseback of improved land, these
transactions are typically structured as one of two types, indirect or direct purchase of the
land by buyer/lessee.
Indirect Purchase. This type of structure involves a structure whereby the seller/lessee
enters into a purchase agreement to acquire certain improved property from a third party
seller. Then, simultaneously with the closing between the seller/lessee and the third party
seller, the seller/lessee assigns its rights under the purchase agreement to buyer/lessor who
actually takes title to the property from the third party seller. This assignment is usually
handled by way of assignment of the purchase agreement. The assignability aspect of this
structure is usually negotiated when the purchase agreement is executed.
Direct Purchase. This type of structure involves an arrangement whereby the seller/lessee
actually closes on the purchase of the property and takes title in its name. Then subsequent
to this closing the buyer/lessor will enter into a purchase agreement to purchase the property
from the seller/lessee. Depending on the transaction, the period of time between the two
closing can be short or long periods of time. The longer time periods are typical of
transactions that entail development and construction on the site.
Construction Sale/Leaseback. The other typical type of sale/leaseback transaction, which

is somewhat more complicated, is the sale/leaseback transaction with construction
financing. This type of transaction involves the acquisition of raw land by the seller/lessee
and the development and construction of the property. This type of transaction usually
includes a structure similar to the direct purchase, however, on occasion the indirect
purchase structure is used.
As mentioned above, this type of structure involves additional risk to the buyer/lessor. The
additional risk arises out of the construction aspect of the deal. In particular, the increased
risk arises from the fact that there will be lienable improvements to the land and draws to
pay for such improvements. These types of issues could give rise to mechanic‘s liens or
contractor‘s liens that
may attach to the property if not paid and lien releases obtained. Additionally, in a recent
Eighth Circuit Court of Appeals decision, the Court held that the Franchisor who designs and
constructs premises may have ADA (American's with Disabilities Act) liability if the design
and construction does not comply with ADA. United States v. Days Inn of America, Inc.,
151 F.3rd 822 (8th Cir. 1998). Sale/leaseback transactions with construction financing
present a higher level of risk to the buyer/lessee in that it has to exercise additional caution
to insure that all lienable work is paid for, that lien waivers are obtained, that the
improvements are built in accordance with the various laws, rules and regulations and, as a
result of the Eighth Circuit decision on ADA liability, that the design and construction of the
premises conform with all federal, state and local laws and ordinances regarding building
construction.
Lease Terms. While the third party seller and the seller/lessee are negotiating the initial
purchase of the property, the seller/lessee and the buyer/lessor are simultaneously
negotiating the sale/leaseback terms. The sale/leaseback terms generally focus on the
buyer/lessor being able to realize an adequate rate of return on the transaction and will also
include the normal rent provisions of rent escalations through the term of the lease. The
lease is generally structured as a triple net lease. Also, these sale/leaseback transactions
may include an option for the seller/lessee to purchase the property, but as discussed below,
caution needs to be taken when drafting such purchase options.
Sale/leaseback transactions are not without complications. In addition to the issues

discussed above, as well as real estate title, environmental and construction related issues
and requirements noted above, sale/leaseback transactions may generate unique
accounting and tax issues.
Accounting Issues. There are numerous rules and regulations devoted to the accounting
treatment for sale/leaseback transactions. A real estate sale/leaseback transaction that
covers the remaining economic life of a property may be treated as a financing transaction or
a capital lease. There are a number of technical factors accountants look to in determining
whether a sale/leaseback transaction will result in capital lease treatment or operating lease
treatment. In general, an operating lease characterization will result in the removal of the
property (and the related financing) from the balance sheet of the seller/lessee. On the other
hand, capital lease characterization will, from financial statement standpoint, continue to
reflect the real estate as an asset and the accompanying liability. These considerations can
be very important in connection with negotiating financial covenants or maintaining loan
agreement requirements (particularly for those operators that have financing from multiple
sources). In determining if a sale/leaseback transaction is an operating lease or a financing
(capital) lease, accountants will look at the following factors:
 transfer of ownership of the property to the lessee at the end of the lease
term;  a bargain purchase option;  whether the lease term equals 75% or
more of the estimated economic life of the
property; and  whether the present value of lease payments equals or exceeds
90% of the fair
market value.
Tax Issues. There may also be numerous tax issues associated with a sale/leaseback
transaction. While a number of factors used to determine the tax treatment are similar to
those analyzed for accounting purposes, these factors are not always consistent. From a tax
standpoint, the primary issue is whether the sale/leaseback transaction will be treated as a
true sale or a financing transaction. In a true sale situation, the seller/lessee will be required
to recognize gain (or loss) on the transaction and will be treated as entering into an
operating lease (providing for deductible rental payments over the life of the lease). In the
financing (capital) lease scenario, the buyer/lessor
is treated as providing financing against the real property asset and the seller/lessee
continues ownership of the asset. In this situation, rental payments will be characterized for
tax purposes as interest and principal payments. In addition to those factors cited above,
the typical factors that define a capital lease for tax purposes include:
 lease payments substantially exceed fair rental value of the property; 

little or no investment risk by the lessor;  burdens and benefits of
ownership of the property rests with seller/lessee; and  economic viability
of the leasing transaction.
Criteria of sales type lease: (Q: 5a,
2010)
A lease is classified as a sales type lease, direct financing, leveraged or operating

lease. To be classified as a sales type lease, a lease must meet one of the four criteria
specified below.
a) The lease transfers the ownership of the property to the lessee by the end of the
lease
term. b) The lease contains an option to purchase the leased property at a
bargain price. c) The lease term is equal to or greater than 75 percent of the
estimated economic life
of the leased property. d) The present value of rental and other minimum lease
payments equals or exceeds 90 percent of the fair value of the leased property less
any investment tax credit retained by the lessor.
Moreover, a sales type lease also contains the following two

criteria.
i. Collectivity of minimum lease payment is reasonably predictable. ii. No important

uncertainties surround the amount of unreimbursable cost yet to be
incurred by the lessor under the
lease.
A lease meeting those criteria is classified as sales types lease if fair value of the
leased property is different from its carrying amount.
Validity of Sale and

Leaseback
To take advantage of the benefits of a sale and a leaseback, both must be valid. No one
factor controls; the overall facts and circumstances surrounding the transactions determine
their validity. Ultimately, the determination will center on whether the transactions have
economic substance and have been based on reasonable market conditions.
Sale. (Q: 5b, 2010)
For the sale to be valid, the controlling shareholder must have taken an equity interest in
the property and assumed the risk of loss. An equity interest exists if the funds for the
purchase of the property came from the shareholder or if he or she borrowed money to
make the purchase. The shareholder‘s purchase of an insurance policy on the property
would show assumption of the risk of loss.
A sale of property is indicated when one or more of the following has

occurred:
1. Portions of periodic lease payments are made specifically applicable to an

equity
interest to be acquired by the lease. 2. The lease acquires title to the property. 3. The
lease payments over a relatively short period constitute an inordinately large
proportion of the amount needed to secured the title. 4. The lease payments materially
exceed the fair rental value. 5. A bargain purchase option is provided in the
lease. 6. A part of periodic payment is specifically designed or recognized as
interest. 7. The lease payments plus the option price approximate the purchase
price and
provide for renewal of the lease at token amounts. 8. The lease payments over a short
period of time approximate the purchase price
and provide for renewal of the lease at token
amounts.
The courts may treat a lease as a sale or financing for tax purposes even though the lease
agreement specifically excludes transfer of title.
or a leaseback to be valid, four tests must be

Leaseback. F
met:
 Theuseful life of the leased property must exceed the term of the lease.  If the
corporation repurchases the property at the end of the lease, it must do so at fair
market value and not at a discount.  If the transaction allows for a renewal at the end
of the original lease term, the renewal rate
must be set at a fair rental value.  The shareholder must have a reasonable
expectation that he or she will generate a profit
from the sale and leaseback, considering both the value of the property when it is
eventually sold and the rent received during the lease term.
Sale Leaseback
Agreements
Sale leaseback agreements can give sellers additional options while selling a
home.
Simply stated, a sale leaseback agreement allows the homeowner to sell his property and
then lease it from the buyer. The previous homeowner becomes the renter and a third party
actually owns the property. A sale leaseback agreement can allow a seller to quickly raise a
large sum of cash as well as gain a long-term housing arrangement. Additionally, the
leaseback helps the original owner have more use of his capital since the financial
obligations of homeownership are alleviated. A sale leaseback agreement is also referred to
as a ―leaseback‖ or ―sale and lease back.‖
Option to Purchase
Under the sale leaseback agreement, the renter does not own the property. Instead the
renter has access to and possession of the home. The leaseback agreement is a long-term
arrangement that typically lasts 10 to 30 years. In many cases, the renter may be given the
option to repurchase her former home after paying an option fee. The option fee is a fee
charged for the privilege of being able to purchase the home.
Real Estate Financing
A sale leaseback agreement can provide the seller with advantageous real estate
financing. With a leaseback option there is no need for the seller to obtain traditional bank
financing or to seek a refinance through a separate lender. The seller may set a fixed lease
payment, an option to renew the lease (which is similar to a refinance) or an option to
repurchase his property. The seller also receives a lump sum of cash upon the sale of his
property. The buyer benefits from a lower purchase price -- which could be less than the
market value -- and a premium rate on the lease payments.
Sale Leaseback
Contracts
The sale leaseback processes can be seamless, meaning that the sale and leaseback
occur simultaneously. For the property sale portion, a standard real estate purchase and
sales contract should be utilized in the sale from the original owner to the new buyer.
Similarly, a traditional residential lease agreement should be used to document the terms
of the leaseback. The seller is referred to as the lessee and the buyer is called the lessor.
Sale Leaseback
Consequences
A sale leaseback agreement does bring about tax, insurance and legal ramifications. The
date the leaseback transaction takes place will affect taxes levied. Sale leaseback
transactions can certainly trigger an IRS audit -- particularly if the property sells for much
lower or higher than the current market rate. The way the property is classified will affect the
insurance rate and coverage. For legal purposes, the documents should be properly
executed to ensure the legitimacy of the transaction. Both the buyer and seller are advised to
consult with competent professionals regarding how a sale leaseback agreement will impact
their situation.
d.
Prepared By M
com Mobile:
01198150195
Short Notes
Kinds of leases
Operating Leases:
An operating lease, broadly speaking, substitutes for a rental.

Hence:
 The term of the lease is usually less than the economic life of the asset. Consequently,
the asset is not fully amortized: lease payments are not enough to recover the entire cost
The lessor is required to maintain and insure the assets. 
of the asset.  There is often
a cancellation option that gives the lessee the option to cancel the lease
contract before expiration.
Financial or Capital Leases:
A financial lease substitutes for a purchase.

Hence:
 Financial leases 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 on expiration.  Financial leases usually
cannot be cancelled.
Types of financial
leases:
 Sale and lease-back: In this kind of lease, a company sells an asset it owns to another
firm
and leases it back immediately.  Leveraged lease: In this case, the
lessor finances the asset partly by debt.
Accounting rules promulgated by FASB (FAS 31) specify the conditions under which a lease
can be treated as an operating lease. Unless these conditions are met, the lease must be
capitalized-- appear on the company's balance sheet.
Leveraged Lease(Q: 6e,

2010)
In a leveraged lease a third-party, long-term creditor provides nonrecourse financing for a

lease agreement between a lessor and a lessee; The term leveraged refers to the fact that
the lessor acquires title to the asset after borrowing a large part of the investment. Leveraged
leases are true (tax oriented) leases because the lessor enjoys all the tax benefits of
ownership (such as depreciation) whereas the lessee can claim the full amount of lease
payment as expenses.
A lease in which a bank or other financial institution provides the lessor (the party granting
the lease and retaining title to the lease good) with credit, which the lessor then uses to
finance the lease. For example, suppose a car dealer (lessor) extends a lease to someone
buying a car (lessee).
The lessor may take a loan from a bank in order to receive capital from the lease of the car
while the lessee drives away with the car. The lessee then makes payments on the lease,
which the lessor then uses to repay the loan to the bank. Importantly, the lessor may take the
leased asset away from the lessee if the lessee defaults, and the bank may do the same if
the lessor defaults.
Due Diligence(Q: 6a, 2010)
Due diligence is a term used for a number of concepts involving either an investigation of a
business or person prior to signing a contract, or an act with a certain standard of care. It can
be a legal obligation, but the term will more commonly apply to voluntary investigations.
In other words, A due diligence investigation is a type of pre-transaction or pre-employment

corporate investigation that tries to uncover details of a company's management, finances,
performance, mission, history, aims, suppliers, clients, industry and any other details that
may affect how a company does business. Due diligence is vital before a merger, company
purchase, or acquisition because it ensures that liabilities are not hidden. Due diligence
ensures that there will be no unpleasant surprises down the road.
A common example of due diligence in various industries is the process through which a
potential acquirer evaluates a target company or its assets for acquisition.
When Due Diligence Investigations should be

performed:
• Hiring a key employee or employees

• Creating a partnership with another, or beginning a business with
another
• Loaning substantial money. Banks have special due diligence needs. See
below
• Taking
on a new client or customer, particularly for professionals (accountant firms,
CPAs,) or a customer of size or significance to the future or the operations
• Engaging a new vendor that may be central to operations or
obligations
• Prior
to a merger or acquisition, or as part of the
process
• For investments of some magnitude or where there are unknowns, e.g.
IPOs
• Engagingwith or purchasing a franchise, or choosing a franchise operation to franchise
your business
• Whena decision is being made to do business with entities or individuals outside of the
country.
Advantages and Disadvantages of Due Diligence

Inquiries
Due diligence investigations allow you to get the current information you need to make good
business and financial decisions. These investigations can help you avoid costly mistakes
and can help you avoid lawsuits caused by a bad business partnership. Investigations such
as these can also be crucial in negotiations by helping you cut through business claims to the
actual facts about a corporation, they help you get the proof you need to negotiate betters
terms.
The only real drawbacks to due diligence investigations is that they are sometimes met with
disapproval from companies. If you investigate a company and find irregular business
practices, that company may be quite resentful. On the other hand, most investigators are
very discreet and no legitimate companies would object to an inquiry, anyway.
Restructuring(Q: 6 ii, 2011) The act or process of changing the terms on the assets and/or
liabilities of a company. That is, a company may consolidate its debts, significantly change
the size and scope of its operations, and take other measures to reduce the strain of
continuing operation. Most companies restructure either as part of a bankruptcy or as an
effort to avoid it. If the company is restructuring as part of a corporate bankruptcy, it is said to
be in receivership.
Corporate restructuring can cover a whole range of activities, from cost-cutting and
streamlining, re-branding, financial restructuring to the worst case scenario of winding down a
business. Businesses can go through many forms of corporate restructuring to remain
competitive and stay in business. Restructuring does not have to be something drastic, but
can be a series of measures undertaken on a regular basis by the company‘s management.
In the current economic climate, many companies are facing a difficult operating
environment. In some cases, this means that corporate restructuring may have to be
undertaken for the business to remain viable.
Sale and Lease back(Q: 6c,

2010)
Leaseback, short for sale-and-leaseback, is a financial transaction, where one sells an asset
and leases it back for the long-term; therefore, one continues to be able to use the asset but
no longer owns it. The transaction is generally done for fixed assets, notably real estate and
planes, trains and automobiles, and the purposes are varied, including financing, accounting,
and taxing.
In other words, Arrangement in which one party sells a property to a buyer and the buyer
immediately leases the property back to the seller. This arrangement allows the initial buyer
to make full use of the asset while not having capital tied up in the asset. Leasebacks
sometimes provide tax benefits. also called leaseback.
Sometimes, a sale-leaseback occurs in order to grant the seller access to capital to make
improvement on the property; for example, the seller may use the proceeds from the sale to
build a factory. A form of sale-leaseback, known as sukuk al-ijara, is a common structure for
sukuk, or the equivalent of a bond, in Islamic finance. Sale-leaseback is also called simply
leaseback.
Lease agreement or
contract
A contract between a lessor and lessee that allows the lessee rights to the use of a property
owned or managed by the lessor for a period of time. The agreement does not provide
ownership rights to the lessee; however, the lessor may grant certain allowances to modify,
change or otherwise adapt the property to suit the needs of the lessee. During the lease
period, the lessee is responsible for the condition of the property.
Formal document that identifies the lessor, lessee, and the leased asset or property, states
lease term and fee (rent), and detailed terms and conditions of the lease agreement.
Lease purchase
Lease contract under which a portion of the lease payment or rent is applied to the purchase
price of the leased asset or property. When the full price is paid up, the title to the item is
transferred from the seller or owner (the lessor) to the buyer or tenant (the lessee). Lease
purchases are a type of hire-purchase and are generally considered to be capital leases for
accounting purposes.
Leased back guarantee
A guarantee by a bank that is then leased back to a third party in return for a fee. Due
diligence is conducted by the bank on the creditworthiness of the customer that is seeking
the bank guarantee. When approved, the issuing bank will become a backer for the debts
that are incurred by the borrower, up to the amount of the guarantee.
A type of long-term, typically for commercial property, lease in which the payments are
variable and adjusted periodically to reflect changes in the property's appraised value or
changes in a certain publicized benchmark rate, such as the Consumer Price Index (CPI). A
graduated lease provides for periodic changes in the payments rather than employing a fixed
payment throughout the life of the lease. In addition to basing payments on current and
changing market conditions, the terms of a graduate lease can state that the payments
automatically increase by a specified percentage or dollar amount at regularly specified time
intervals.
For example, if a company has a 99 year lease on land under a graduated lease, the
payments can be adjusted every 10 years to reflect the current market value of the land. If
market values increase, this helps protect the land owner against losses resulting from
payments that would be too low for current market conditions. In a different scenario, a
graduated lease may be used to entice a company to lease a property that in the beginning
has relatively small payments. As time passes, the payments increase on a regular basis,
such as with an annual rent increase of 5%. This scenario is helpful to entrepreneurs who
need to save money in the first few years of a lease while the business is being established.
Lease schedule
Formal attachment or annex to a master lease that lists and describes the leased item,
lease payments, and other terms applicable to the lease. A new lease schedule is
executed whenever an item is added to the master lease. The lease terms and conditions
either may be fixed as per the master lease or may be subject to individual negotiations for
every schedule.
Lease to own
An agreement between an owner and lessee which allows for the option of purchasing a
leased item when the lease period expires. A lease to own arrangement generally includes
a clause with a predetermined time and price for the lessee to make the purchase. In most
cases, some or all of the lease payments can be applied toward the purchase.
Lease underwriting
Arrangement under which a lender (such as a bank or leasing company) enters into a lease
agreement and assumes the responsibility of arranging any financing required.
Leasehold
Property held under a lease for a stated period and under specified terms and conditions. In
contrast, a freehold property is held for an indefinite period under absolute rights of
ownership.
Leasehold estate
Exclusive right to enjoy the possession and use of a parcel of land or other asset for a limited
period. In contrast, a freehold estate is for an indefinite period.
Leasehold cost
A method for capitalizing the expenses associated with initiating and maintaining a lease.
Leasehold costs in the case of may include delay rental payments, taxes, bonuses paid to
the holder of mineral rights to the leased property, and similar costs.
Lease utilization
The use of a parcel of land in accordance with the zoning classification, plat or deed
restrictions, and the lease provisions outlined between the lessor and lessee. Any departure
from the utilization agreement between the parties is grounds for cancellation of the
agreement and may result in civil litigation.
Leased employees
Employees that have been attained from a professional employer organization (PEO). The
PEO is the official employer of the leased workers and handles payroll, tax reporting, and
benefits. However, the employees complete the work for the leasing company or business
owner. Some company owners find this to be a more beneficial way of completing projects
without the added responsibility of human resource management. Also called contracted
workers.
Lease with option to renew
Lease agreement under which a lessee has the right to renew the lease at the end of the
lease term, at the same or a different rate.
The End of Lease options at the end of the

lease
Lessee may have a few flexible options to choose from; he may purchase the equipment
for its purchase option amount, renew the lease for a specified period of time, or return
the equipment with no further obligation.
Running rate
The running rate is obtained by computing the interest rate of the lease payments over the
term of the lease, using the cost of the equipment as present value in the calculation. Since
it doesn‘t include the return that the lessor hopes to earn from the asset‘s residual value, the
running rate will generally be quite low and in certain cases may even be negative.
Effective rate
The effective rate means different things to different people. It usually means the interest rate
being paid by the lessee, similar to the way running rate is calculated, but including a
reasonable assumption as to what the ultimate residual value of the equipment may be at the
end of the lease term. Since residual value estimates tend to vary, the estimated effective
rate for the same transaction will also tend to vary, depending upon who is trying to come up
with the rate.
Open-end Lease
A conditional sale lease in which the lessee guarantees that the lessor will realize a
minimum value from the sale of the asset at the end of the lease.
Sales-type Lease
A lease by a lessor who is the manufacturer or dealer, in which the lease meets the
definitional criteria of a capital lease or direct financing lease.
Synthetic Lease
A synthetic lease is basically a financing structured to be treated as a lease for accounting

purposes, but as a loan for tax purposes. The structure is used by corporations that are
seeking off-balance sheet reporting of their asset based financing, and that can efficiently
use the tax benefits of owning the financed asset.
Tax Lease
A lease wherein the lessor recognizes the tax incentives provided by the tax laws for
investment and ownership of equipment. Generally, the lease rate factor on tax leases is
reduced to reflect the lessor's recognition of this tax incentive.
Trac Lease
A tax-oriented lease of motor vehicles or trailers that contains a terminal rental adjustment
clause and otherwise complies with the requirements of the tax laws.
True Lease
A type of transaction that qualifies as a lease under the Internal Revenue Code. It allows the
lessor to claim ownership and the lessee to claim rental payments as tax deductions.
Full Payout Lease
A lease in which the lessor recovers, through the lease payments, all costs incurred in the
lease plus an acceptable rate of return, without any reliance upon the leased equipment's
future residual value.
Guideline Lease
A lease written under criteria established by the IRS to determine the availability of tax
benefits to the lessor.
Direct Financing Lease (Direct

Lease)
A non-leveraged lease by a lessor (not a manufacturer or dealer) in which the lease

meets any of the definitional criteria of a capital lease, plus certain additional criteria.
First Amendment Lease
The first amendment lease gives the lessee a purchase option at one or more defined
points with a requirement that the lessee renew or continue the lease if the purchase option
is not exercised. The option price is usually either a fixed price intended to approximate fair
market value or is defined as fair market value determined by lessee appraisal and subject
to a floor to insure that the lessor's residual position will be covered if the purchase option is
exercised.
If the purchase option is not exercised, then the lease is automatically renewed for a fixed
term (typically 12 or 24 months) at a fixed rental intended to approximate fair rental value,
which will further reduce the lessor's end-of-term residual position. The lessee is not
permitted to return the equipment on the option exercise date. If the lease is automatically
renewed, then at the expiration of that initial renewal term, the lessee typically has the right
either to return the equipment without penalty or to renew or purchase at fair market value.
Vendor leasing
This type of lease involves a financing source and a vendor to ensure and promote vendor
sales with adequate financial support from the financing firm. The financing firm ties up with
the vendor to offer financing schemes, conditional sales contracts and leases to the vendors
customers.
Full-service lease
The lessor or leasing firm incurs expenses for additional services such as maintenance,
insurance and property taxes such that the expense is built into the lease payments.
Technology refresh" options? In this world of high technology, being "state of the art"
usually lasts about as long as it takes to install the equipment! As a result, many lessees
are beginning to insist on technology refresh clauses, which give them some defined
alternatives as to upgrading technology, adding additional assets, etc., without having to
renegotiate and then rewrite the entire lease transaction.
Bargain Purchase Option An option in a lease agreement that allows the lessee to
purchase the leased asset at the end of the lease period at a price substantially below its fair
market value. The bargain purchase option is one of four criteria, any one of which, if
satisfied, would require the lease to be classified as a capital or financing lease that must be
disclosed on the lessee's balance sheet. The objective of this classification is to prevent
"off-balance sheet" financing by the lessee.
For example, assume that the value of an asset at the end of the lease period is estimated
at $100,000, but the lease agreement has an option that enables the lessee to purchase it
for $70,000. This would be considered as a bargain purchase option and would require the
lessee to treat the lease as a capital lease.
There are significant differences in the accounting treatment of the leased asset and lease
payments for capital leases and operating leases.
Investment
Banking
Chapter 8: Investment
Banking
History of Investment
Banking
Investment banking practices such as extending credit to merchants date back to ancient
times. In the 1600s, early investment institutions such as acceptance houses and merchant
banks helped finance foreign trade and accumulated funds for long-term investments
overseas.
The nineteenth century saw the rise of several prominent banking partnerships such as those
created by Rothschilds, the Barings and the Browns. These firms had their origins in the
Atlantic trade; financing the importation of commodities for European manufacturers and
helping them export their finished products around the world.
In the United States, investment banking received a boost during the American Civil War.
Syndicate banking houses sold millions of dollars worth of government bonds to large
numbers of individual investors to help finance the war. This marked the first mass-market
securities sales operation, a practice that continued later in the 1800s to finance the
expansion of the transcontinental railroads.
The 1800s also saw the birth of some of the most famous firms in investment banking, many
of which are still with us, in one form or another, 150 years later. The firm of J. P. Morgan
played a major role in the corporate mergers of the era, such as the merger of U.S. Steel
Corp and the Northern Pacific and Great Northern railroads. The firm grew to such size and
prominence at the turn of the century that J.P. Morgan, the founder, is credited for ―saving‖
Wall Street during the banking crisis of 1907 by allegedly locking top executives from major
banks in his office until they hammered out a solution.
Goldman Sachs was founded in 1869 by German Jewish immigrants Marcus Goldman who
later partnered with his son-in-law, Samuel Sachs. Goldman Sachs was among the pioneers
of the initial public offering (IPO), and managed one of the largest IPOs at that time, for
Sears, Roebuck and Company in 1906.
In the early twentieth century, investment banking expanded dramatically. One reason was
an increase in the number of individuals who owned stock, something that resulted from the
prosperous years after the First World War. However, the ensuing run-up in stock prices
created an unsustainable bubble that finally collapsed with the Great Depression in 1929.
The U.S. plunged into one of the worst depressions in history. More than 11,000 banks failed
or merged, and a quarter of the population was out of work.
The excesses of that period and the many bank failures led to a flood of new regulations to
protect investors from fraudulent stock promoters and stabilize the banking system. It led to
the passing of the Federal Securities Act of 1933, which required ―full disclosure‖ of
accurate information for publicly offered securities and a prospectus filed with the Securities
and Exchange Commission.
More importantly for investment banks, the government passed the Glass-Steagall Act in
1933, which compelled commercial banks to separate themselves from their securities
distribution arms. Large universal banks such as JP Morgan, for instance, split into separate
entities. In JP Morgan‘s case, it created JP Morgan as a commercial bank, Morgan Stanley
as an investment bank, and Morgan Grenfell, as a British merchant bank. The Glass-Steagall
Act remained in force until it was repealed during the Clinton administration in 1999.
Investment Banking:
An investment bank is a financial institution that assists individuals, corporations and

governments in raising capital by underwriting and/or acting as the client's agent in the
issuance of securities. An investment bank may also assist companies involved in mergers
and acquisitions, and provide ancillary services such as market making, trading of
derivatives, fixed income instruments, foreign exchange, commodities, and equity securities.
It is a specific division of banking related to the creation of capital for other companies.
Investment banks underwrite new debt and equity securities for all types of corporations.
Investment banks also provide guidance to issuers regarding the issue and placement of
stock.
The meaning of investment banking is not the financial investment in the banking sector. But
in fact, investment banking is a kind of banking function which is used to help clients in
creating wealth and funds. The commercial banks use this type of banking in accord with
sensible and practical use of the available resources. Not only this, investment banking and
people engaged in this sector also provides advice on how to transact in business they are
currently in.
At Last we can say that, Investment banking is a form of banking which finances the capital
requirements of enterprises. Investment banking assists as it performs IPOs, private
placement and bond offerings, acts as broker and helps in carrying out mergers and
acquisitions.
Investment Bank:
A financial intermediary that performs a variety of services is known as investment bank. This
includes underwriting, acting as an intermediary between an issuer of securities and the
investing public, facilitating mergers and other corporate reorganizations, and also acting as
a broker for institutional clients.
An investment bank is a financial institution which raises capital, trades securities, and
manages corporate mergers and acquisitions. Another term used for investment banking is
corporate finance.
Investment banks work for companies and governments, and profit from them by raising
money through the issuance and selling of securities in capital markets (both equity and debt)
and insuring bonds (for example selling credit default swaps), and providing the necessary
advice on transactions such as mergers and acquisitions. Most of investment banks provide
strategic advisory services for mergers, acquisitions, divestiture or other financial services for
clients, like the trading of derivatives, commodity, fixed income, foreign exchange, and equity
securities.
The role of the investment bank begins with pre-underwriting counseling and continues after
the distribution of securities in the form of advice.
Investment Banker:
A person representing a financial institution that is in the business of raising capital for
corporations and municipalities is known as investment banker.
An Investment Banker can be considered as a total solutions provider for any corporate,
desirous of mobilizing its capital. The services provided range from investment research to
investor service on the one hand and from preparation of the offer documents to legal
compliances & post issue monitoring on the other. A long lasting relationship exists between
the Issuer Company and the Investment Banker.
Types of Investment
Most probably there are two types of investment are available in this present business world.
A brief discussion is given below.
1. Financial Instruments  Equities: Equities are a type of security that represents

the ownership in a company. Equities are traded (bought and sold) in stock markets.
Alternatively, they can be purchased via the Initial Public Offering (IPO) route, i.e. directly
from the company. Investing in equities is a good long-term investment option as the
returns on equities over a long time horizon are generally higher than most other
investment avenues. However, along with the possibility of greater returns comes greater
risk.  Mutual funds: A mutual fund allows a group of people to pool their money
together and have it professionally managed, in keeping with a predetermined investment
objective. This investment avenue is popular because of its cost-efficiency,
risk-diversification, professional management and sound regulation. You can invest as
little as Rs. 1,000 per month in a mutual fund. There are various general and thematic
mutual funds to choose from and the risk and return possibilities vary accordingly. 
Bonds: Bonds are fixed income instruments which are issued for the purpose of raising
capital. Both private entities, such as companies, financial institutions, and the central or
state government and other government institutions use this instrument as a means of
garnering funds. Bonds issued by the Government carry the lowest level of risk but could
deliver fair returns.  Deposits: Investing in bank or post-office deposits is a very
common way of securing
surplus funds. These instruments are at the low end of the risk-return spectrum.  Cash
equivalents: These are relatively safe and highly liquid investment options. Treasury bills
and money market funds are cash equivalents.
2. Non-financial Instruments  Real estate: With the ever-increasing cost of land,

real estate has come up as a profitable
investment proposition.  Gold: The 'yellow metal' is a preferred investment option,
particularly when markets are volatile. Today, beyond physical gold, a number of products
which derive their value from the price of gold are available for investment. These include
gold futures and gold exchange traded funds.
Types of Investment
Banking
Many investment banks are divided into three categories that deal with front office, back
office, or middle office services.
 Front Office Investment Bank Services: Front office services typically consist
of investment banking such as helping companies in mergers and acquisitions, corporate
finance (such as issuing billions of dollars in commercial paper to help fund day-to-day
operations, professional investment management for institutions or high net worth
individuals, merchant banking (which is just a fancy word for private equity where the
bank puts money into companies that are not publicly traded in exchange for ownership),
investment and capital market research reports prepared by professional analysts either
for in-house use or for use for a group of highly selective clients, and strategy formulation
including parameters such as asset allocation and risk limits.
 Middle Office Investment Bank Services: Middle office investment banking

services include compliance with government regulations and restrictions for professional
clients such as banks, insurance companies, finance divisions, etc. This is sometimes
considered a back office function. It also includes capital flows. These are the people that
watch money coming into and out of the firm to determine the amount of liquidity the
company needs to keep on hand so that it doesn't get into financial trouble. The team in
charge of capital flows can use that information to restrict trades by reducing the buying /
trading power available for other divisions.
 Back Office Investment Bank Services: The back office services include the
nuts and bolts of the investment bank. It handles things such as trade confirmations,
ensuring that the correct securities are bought, sold, and settled for the correct amounts,
the software and technology platforms that allow traders to do their job are state-of-the-art
and functional, the creation of new trading algorithms, and more. The back office jobs are
often considered unglamorous and some investment banks outsource to specialty shops
such as custodial companies. Nevertheless, they allow the whole thing to run. Without
them, nothing else would be possible.
Principal Functions of Investment

Banks
Global investment banks typically have several business units, each looking after one of the
functions of investment banks. For example, Corporate Finance, concerned with advising on
the finances of corporations, including mergers, acquisitions and divestitures; Research,
concerned with investigating, valuing, and making recommendations to clients – both
individual investors and larger entities such as hedge funds and mutual funds regarding
shares and corporate and government bonds); and Sales and Trading, concerned with
buying and selling shares both on behalf of the bank‘s clients and also for the bank itself. For
Investment banks management of the bank‘s own capital, or Proprietary Trading, is often one
of the biggest sources of profit. For example, the banks may arbitrage stock on a large scale
if they see a suitable profit opportunity or they may structure their books so that they profit
from a fall in bond price or yields. In short the functions of Investment banks include:
1. Raising Capital 2.
Brokerage Services 3.
Proprietary trading 4.
Research Activities 5.
Sales and Trading
1. Raising Capital
Corporate Finance is a traditional aspect of Investment banks, which involves helping

customers raise funds in the Capital Market and advising on mergers and acquisitions.
Generally the highest profit margins come from advising on mergers and acquisitions. It also
can be segregated by,
 Advisory functions: Investment banking serves a potential security issuer in an

advisory capacity. It helps the issuing firm analyze its financing needs and suggests
different ways of raising funds.  Administrative functions: Investment banking shares
with issuer the responsibility of conforming to the securities laws involving with the
preparation of registration statement and prospectus. Securities and Exchange
Commission requires that most primary issues should be accompanied by a registration
statement disclosing information that should allow potential investors to assess the quality
of the new issues. The information must be published in registration statements are set by
law. After filling the registration statement with SEC, there is usually a brief waiting until
the new issue may be offered for sales.  Underwriting functions: Underwriting refers
to the guarantee by investment banking that the issue of the new securities will receive
certain amount of cash for them. Investment banking buys the securities from issuing firm
on the day of offering. It forms syndicate and take the responsibility of selling all the new
issues to the public.
2. Brokerage
Services
Brokerage Services, typically involves trading and order executions on behalf of the
investors. This in turn also provides liquidity to the market. These brokerages assist in the
purchase and sale of stocks, bonds, and mutual funds.
3. Proprietary Trading
Under Investment banking proprietary trading is what is generally used to describe a situation
when a bank trades in stocks, bonds, options, commodities, or other items with its own
money as opposed to its customer‘s money, with a view to make a profit for itself. Though
Investment Banks are usually defined as businesses, which assist other business in raising
money in the capital markets (by selling stocks or bonds), they are not shy of making profit
for itself by engaging in trading activities.
4. Research Activities
Research, is usually referred to as a division which reviews companies and writes reports
about their prospects, often with ―buy‖ or ―sell‖ ratings. Although in theory this activity
would make the
most sense at a stock brokerage where the advice could be given to the brokerage‘s
customers, research has historically been performed by Investment Banks (JM Morgan
Stanley, Goldman Sachs etc). The primary reason for this is because the Investment Bank
must take responsibility for the quality of the company that they are underwriting Vis a Vis t he
prices involved to the investor.
5. Sales and Trading
Often referred to as the most profitable area of an investment bank, it is usually responsible
for a much larger amount of revenue than the other divisions. In the process of market
making, investment banks will buy and sell stocks and bonds with the goal of making an
incremental amount of money on each trade. Sales are the term for the investment banks
sales force, whose primary job is to call on institutional investors to buy the stocks and
bonds, underwritten by the firm. Another activity of the sales force is to call institutional
investors to sell stocks, bonds, commodities, or other things the firm might have on its books.
Conclusion
Whatever the conflicts the investments banks raises in their operation, the role of them in the
capital market is undeniable. In promoting the business of the larger companies by raising
capitals, distributing shares or bonds; in handling the risk of the little investors by suggesting
them on their trading along with managing their investments and above all in making a bridge
between sellers & buyers of certain products available in the money market, the investment
bankers have already proved themselves to be the indispensable part.
Characteristics of Investment
Banking
An investment bank is a financial institution that helps companies take new bond or stock
issues to market, usually acting as the intermediary between the issuer and investors.
 Investment banks may underwrite the securities by buying all the available shares at a
set price and then reselling them to the public. Or the banks may act as agents for the
issuer and take a commission on the securities they sell.  Investment banks are also
responsible for preparing the company prospectus, which
presents important data about the company to potential investors.  In addition,
investment banks handle the sales of large blocks of previously issued
securities, including sales to institutional investors, such as mutual fund companies. 
Unlike a commercial bank or a savings and loan company, an investment bank doesn't
usually provide retail banking services to
individuals.
Operations of Investment
Banking
This involves data-checking trades that have been conducted, ensuring that they are not
erroneous, and transacting the required transfers. Many banks have outsourced operations.
It is, however, a critical part of the bank. Due to increased competition in finance related
careers, college degrees are now mandatory at most Tier 1 investment banks. A finance
degree has proved significant in understanding the depth of the deals and transactions that
occur across all the divisions of the bank.
How Investment Banking Operations Differ From Other

Banks
Unlike commercial banks and savings and loans, investment banks do not seek cash
deposits from customers in the form of checking and savings accounts, and they do not make
traditional interest- bearing loans to individual customers.
Investment banks instead make their money

primarily
 By advising corporate clients on the creation of stocks, bonds and other securities  By
underwriting securities  By facilitating mergers and acquisitions, along with any due
diligence and securities
exchanges that may go along with them.  And by
brokering (or selling) securities to investors.
Investment bankers have also created a broad array of investment options to go along with
traditional stocks and bonds, including securities derivatives such as call and put options,
which allow investors to lock in a buy or sell price on an investment at a future date, and
credit default swaps, which insure bond buyers against the risk that a bond seller will renege
on the debt.
Investment banks also lend stocks to facilitate short trades, in which speculators borrow
stock and sell it in hopes that its price will decline before they rebuy it and return it to the
lender.
Investment Banking: The Role of Investment Banking In the
Society:
Investment banking is a particular banking system that allows customers to invest their
money directly or indirectly and also helps companies, government and individual raise fund
by means of bond selling, security sales, mergers and acquisitions and issuing of IPO.
Investment banking gives both the learned and the novice in the investment industry the
opportunity to maximize better dividend of their business or property by way of mergers and
acquisitions.
Investment banking helps to boost the economy of the commercial sections of the society in
other words they create more opportunity for both the employed and unemployed ones to
raise capital and make profit.
They also help boost the financial security of a country from possible financial drop down.
Every economy that wants to have a growing financial status must require the services of
investment banking.
Buy side and Sell side of Investment Bank (Q. 4b,

2011)
Buy Side
The buy side is the side that buys stuff. On the other hand, the sell side of the business is
selling stuff. Buy side buys, and sell side sells! So the question is what is buy side buying,
and what is sell side selling?
The buy side consists of institutions such as hedge funds, mutual funds, pension funds, and
insurance firms that are buying large quantities of securities for money management
purposes. Their goal is to make investments that align with investors‘ expectations. As
oppose to sell side analysts, buy side analysts‘ research and strategies do not get published
and it‘s used to benefit the specific firm that came up with it.
Sell Side
To an investment banker, stock is a product. That product is created, through an IPO, and
then sold in the market. The creators and "servicers" of stock product are collectively called
"the sell-side."
This includes investment bankers who bring the company public, analysts who do research
on stocks and make public upgrades and downgrades on the stock, and the market makers
who trade stock continually, and profit from the spread between the bid and the ask. At an
investment bank, all of these functions are performed at a single institution. Anyone
associated with an institution that does all or part of these functions is said to be "from the
sell-side."
Sell side is selling research, advice and securities it created to the companies and investors.
Whenever you see a report that advises you to buy, sell, or hold the stock, that‘s coming from
the sell side of the business. Investment banking falls in the category of the sell side.
 The Sell-Side: Investment Banking, Sell-Side Research, (Some) Trading at Banks

 The Buy-Side: Private Equity, Hedge Funds, Buy-Side Research, Prop Trading,
Venture
Capital, Asset Management, Other Types of Miscellaneous ―Investment
Firms‖
Chapter 9: Laws governing Investment

Banking
These rules are necessary for Investment

Banking
 Securities and Exchange Ordinance

1969
 Securities and Exchange Rules

1987
 Securities and Exchange commission Act

1993
 Merchant Bank Rules
 Public Issue Rules
 Bond Issue Rules
 Right Issue Rules
 Credit Rating Rules

All the Acts and Rules are available in this websites, described
Below-
1. Business laws of
Bangladesh:
http://www.businesslaws.boi.gov.bd/index.php?option=com_eregistry&view=La
w&Ite mid=60&lang=en
2. Securities and Exchange Commission of

Bangladesh:
http://www.secbd.org/lawsupdated.ht
ml
d.
Prepared By M
com Mobile:
01198150195
Roles of Securities and Exchange Commission in the Protection of the

Interest of the Investor:( Q 4d, 2011)
Securities and Exchange Commission has introduced different acts, rules and
regulation in protection of the interest of the investors. They are described below-
Securities and Exchange Commission Act, 1993: It is expedient for the establishment of
the Securities and Exchange Commission for the purpose of the protection of interest of
investors in securities, for the development of the securities markets toward achieving the
objectives of the securities investors. To protect the interest of the investors in securities, the
securities and exchange commission can apply all the power under the code of civil
procedures, 1908 (Act V of 1908) with a view to investing into the affairs of brokers,
sub-brokers, share transfers agents, bankers to an issuer, underwriters, portfolio managers,
investment advisers and such other intermediaries associated with the dealing in securities
markets.
The Depository Act, 1999: The act has effects on any other law for the time being relating to
the holding and transfer of securities. To avoid any fraudulent a transfer of securities must be
effective by making an appropriate entry in the depository register as per provision of the
regulation as per provision, the commission preserves the right, for the interest of the
investors to issue an order and direction to any person associated with the depository or with
the issuer.
Mutual Fund regulation,1997: In exercise of the powers conferred by section 25 of the
securities and exchange commission act, 1993 (Act No, 15 of 1993), the commission makes
some regulations to protect the interest of the investor, as for example, a penalty of cancellation
of registration of mutual fund may be imposed when indulges in manipulation of price rigging or
any activity affecting securities markets and the investors interest as well. Action may also be
taken against mutual funds when its financial position deteriorates to such an extent that the
commission may consider that its continuance is not in the interest of the investors.
Depository Regulation, 1999: Under the purview of the depositories act, 1999, the Securities
and Exchange Commission, by the depository‘s regulations, 1999 may seek further document or
information for the consideration of an application. If any document or information furnished to
the commission by any depository is found to be incorrect or misleading in material particular
after the grant of the registration certificate, the said certificate may be cancelled. If the
Commission finds that, it is not suitable to protect the interest of and helpful to capital market, it
may reject the application mentioning the reasons thereof.
Self Regulation: The stock exchange (both DSE & CSE) regulate and monitor trading and all
activities of broker/dealer and the listed firms as well for the benefit of the investors and for the
safeguard of the financial system. The exchanges regulate themselves as part of combined effort
involving the SEC itself and member firms. During a typical trading f=day the exchanges
continuously monitor all market participants. They also monitor the performance of brokers,
dealers and specialists in their responsibilities for maintaining a fair and orderly market on the
stocks they are dealing. After the market crash in 1996, DSE has instituted several measures
one of which is called ―circuit-breaker‖ to reduce the market volatility and serve the investors
best interest.
By using this rules and regulation Securities and Exchange Commission protects the
interest of the Investors.
Chapter 10: Investment Banking

and IPOs
Initial Public Offering (IPO)
An initial public offering (IPO) or stock market launch is a type of public offering where
shares
of stock in a company are sold to the general public, on a securities exchange, for the first
time.
Through this process, a private company transforms into a public company. Initial public
offerings
are used by companies to raise expansion capital, to possibly monetize the investments of
early
private investors, and to become publicly traded enterprises. A company selling shares is
never
required to repay the capital to its public

investors.
After the IPO, when shares trade freely in the open market, money passes between public
investors.
Although an IPO offers many advantages, there are also significant disadvantages. Chief
among
these are the costs associated with the process, and the requirement to disclose certain
information
that could prove helpful to competitors, or create difficulties with vendors. Details of the
proposed
offering are disclosed to potential purchasers in the form of a lengthy document known as a
prospectus.
Most companies undertaking an IPO do so with the assistance of an investment banking firm
acting
in the capacity of an underwriter. Underwriters provide a valuable service, which includes

help
with correctly assessing the value of shares (share price), and establishing a public market
for
shares (initial sale). Alternative methods, such as the Dutch auction have also been explored.
In
terms of size and public participation, the most notable example of this method is the Google
IPO.
China has recently emerged as a major IPO market, with several of the largest IPO offerings
taking
place in that country.
IPO Process handled by investment bank. (Q. 4b,

2010)
IPOs generally involve one or more investment banks known as "underwriters". The company
offering its shares, called the "issuer", enters into a contract with a lead underwriter to sell its
shares to the public. The underwriter then approaches investors with offers to sell those
shares. The
main activity of the investment banker is underwriting, which involves the purchase of the
security
issue from issuing at an agreed-upon price and bearing the rise of selling it to the public at
profit.
The process of initial public offering can be illustrated through the following
flowchart.
Issuing Company: When a company is aiming to go public, at first it hires an
investment bank to do the underwriting, the way of raising money through equity or
debt, functions associated with the issue. Although, a company itself also may sell its
shares but, usually an investment bank is selected for that purpose. Underwriters act
as intercessors between the public, who are investing, and the companies.
Originator: An investment banker works as originator. It advises the issuer of
securities about analysis of financing needed and suggests different way of raising
fund. In this part Originator have to maintain different activities such as,
 The investment bank and the company will first initiate the process of deal
negotiation. The main discussing issues are the money amount that the company is
going to raise, security type to be issued and all the other details involved with the
underwriting agreement.  Once the deal gets finalized, the investment bank sets a
registration statement up which will be submitted to the Securities and Exchange
Commission. That registration statement consists of information regarding the offering
and also other company information like, background of the management, financial
statements, legal issues etc.  Then the Securities and Exchange Commission (SEC)
needs a cooling off period during which it will examine all the submitted documents
and make sure that all information regarding the deal has been given to them. After
getting the SEC's approval, a date is going to be fixed on which the company will offer
the stock to the public.  During the above mentioned cooling off period the
underwriter publishes an initial prospectus that contains all the necessary information
regarding the company. The effective date of issuing the stock as well as the price has
not been mentioned in the prospectus, for these are not known at this time.
Investment Banker
estment Banker inat
Originating or
Investment Bank
Orig
inat
or
Underwriting Orig
Syndicate
Investment Banker inat
Investment Banker
or
Orig
Issuing Company
Investing Public
IPO Process
Selling Group
 Then the company and the underwriter meet to decide the price of the stock. This
decision depends highly on the current market
condition.
Investors: Investors are common people or institutions who are interested to invest
their money in security market. They are the original owner of the firm.
Under pricing
The pricing of an initial public offering (IPO) below its market value. When the offer price is
lower than the price of the first trade, the stock is considered to be underpriced. A stock is
usually only underpriced temporarily because the laws of supply and demand will eventually
drive it toward its intrinsic value. It is also known as the initial return or first day return of the
IPO.
Under pricing = (First day Closing Price – Offer Price) ÷ Offer price ×
100%
The first-day closing price represents what the investors are willing to pay for the firm‘s
shares. If the offer price is lower than the first-day closing price, the IPO is said to be
underpriced and money is left on the table for new investors. Since existing shareholders
settle for a lower offer price/proceeds than what they could have got, money left on the table
represents the wealth transfer from existing shareholders to new shareholders.
Money left on the table = (First-day closing price – Offer price) × Number of
shares
On average, the amount of money left on the table is about twice the amount of direct
underwriting fees, and for many IPO firms it can equal several years of operating profit.
Although most IPOs are underpriced, the level of under pricing varies across IPOs with
different issue characteristics, allocation mechanisms, underwriter reputation, and general
financial market conditions.
For example, the level of under pricing is reduced for larger IPOs, those underwritten by
prestigious investment banks, firms with a longer operating history or more experienced
insiders on the board, and those which intend to use the proceeds to repay debt. On the
other hand, technology firms, firms backed by venture capital, firms with negative earnings
prior to the IPO, or firms that went public during a bull market experience greater under
pricing.
It is believed that IPOs are often underpriced because of concerns relating to liquidity and
uncertainty about the level at which the stock will trade. The less liquid and less predictable
the shares are, the more underpriced they will have to be in order to compensate investors
for the risk they are taking. Because an IPO's issuer tends to know more about the value of
the shares than the investor, a company must underpriced its stock to encourage investors to
participate in the IPO.
Selling Group: Selling group consists of various investment bankers or banks through
which invests pay for the purchase price of shares. They are the last level of IPO
process before investors. Investors communicate to the issuing company through
selling groups.

Lease Finance and Investment Banking PDF

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Lease Finance and Investment Banking PDF

Uploaded by

Copyright:

Available Formats

Lease Finance and Investment

Lease Finance and Investment Banking

Md. Mazharul Islam Jony, studying BBA, major in Finance at

Md. Mazharul Islam

Name of chapters included in this book

Lease Finance: 1-40

Concept of Lease Finance: (Q 1a: 2010, 2011) ​A lease could be

History and development of

Jagannath University Department of Finance Md. Mazharul Islam Jony ​2 | ​Page

Jagannath University Department of Finance Md. Mazharul Islam Jony ​3 | ​Page

Importance of Lease Finance ​(Q: 2b,

Jagannath University Department of Finance Md. Mazharul Islam Jony ​4 | ​Page

Lease: ​Conceptually, a lease may be defined as a contractual arrangement/transaction in

Lease-broker: ​There may be a lease-broker who acts as an intermediary in arranging lease

Asset: ​The asset, property or equipment to be leased is the subject-matter of a contract of

Jagannath University Department of Finance Md. Mazharul Islam Jony ​6 | ​Page

1. ​Captive leasing companies: ​These are usually subsidiaries of a parent

Structure of Financial Lease: A finance lease is structured to include the following

Jagannath University Department of Finance Md. Mazharul Islam Jony ​7 | ​Page

Jagannath University Department of Finance Md. Mazharul Islam Jony ​8 | ​Page

Structure of Operating Lease:

4. Sale and leaseback: (Q: 1b, 2011)

• ​Theassets to be sold must be fully owned and free of any security

Jagannath University Department of Finance Md. Mazharul Islam Jony ​9 | ​Page

Opportunities of sale and lease

• ​safeguard the availability of capital stock

2. Domestic Lease and International

Comparison between Leasing and

1. ​Improvement of cash flow:

2. ​Easier to finance than purchases:

3. Sales Tax Implications:

4. ​Keep pace with technology:

6. ​Balance sheet benefits:

Why Do Companies Lease Equipment? ​Companies choose operating

Advantages of lease financing or why do companies lease: ​(Q: 2a,

business does, the lease rate never

There is typically an option to buy equipment at end of lease

 Lessee can keep upgrading; as new equipment becomes available he can

latest models each time your lease

 Typically, it is easier to obtain lease financing than loans from commercial

on how the lease is

Problems of Leasing ​(Q: 2b,

2. ​Lack of Qualified Personnel:

5. ​Delayed Payment and Bad

Economic Rationale for Leasing ​(Q: 1a,

Financial Evaluation: Lessor’s

Advantages of Leasing form Lessor’s

Chapter 4 Accounting aspect of lease

Capitalization Criteria (Lessor) (Q: 2c,

Group I (​Criteria Applicable to Both Lessee and Lessor “Column

Group II (​Criteria Applicable to Lessor Only “Column

Direct Financing Leases

Sales-Type Leases (Lessor) ​(Q: 5a,

 In distinguishing between a sales-type lease and a direct financing lease, the

Are there accounting benefits to

depreciation such as MACRS is

'Off' the balance sheet Financing: ​(Q: 1c,

Insight: some businesses consider operating leases to be advantageous, especially if the

Loan Repayment Schedule:

Year Beginning Balance Installment Interest Amortization Ending Balance 0 74000

Depreciation and tax savings

NPV Analysis of Owing:

Year Installment – Tax Savings COAT PV of COAT at 7.2%

Concept of Lease Finance: (Q 1a: 2010, 2011) A lease could be

Jagannath University Department of Finance Md. Mazharul Islam Jony 2 | Page

Jagannath University Department of Finance Md. Mazharul Islam Jony 3 | Page

Importance of Lease Finance (Q: 2b,

Jagannath University Department of Finance Md. Mazharul Islam Jony 4 | Page

Lease: Conceptually, a lease may be defined as a contractual arrangement/transaction in

Lease-broker: There may be a lease-broker who acts as an intermediary in arranging lease

Asset: The asset, property or equipment to be leased is the subject-matter of a contract of

Jagannath University Department of Finance Md. Mazharul Islam Jony 6 | Page

1. Captive leasing companies: These are usually subsidiaries of a parent

Jagannath University Department of Finance Md. Mazharul Islam Jony 7 | Page

Jagannath University Department of Finance Md. Mazharul Islam Jony 8 | Page

• Theassets to be sold must be fully owned and free of any security

Jagannath University Department of Finance Md. Mazharul Islam Jony 9 | Page

• safeguard the availability of capital stock

1. Improvement of cash flow:

2. Easier to finance than purchases:

4. Keep pace with technology:

6. Balance sheet benefits:

Why Do Companies Lease Equipment? Companies choose operating

Advantages of lease financing or why do companies lease: (Q: 2a,

Problems of Leasing (Q: 2b,

2. Lack of Qualified Personnel:

5. Delayed Payment and Bad

Economic Rationale for Leasing (Q: 1a,

Group I (Criteria Applicable to Both Lessee and Lessor “Column

Group II (Criteria Applicable to Lessor Only “Column

Sales-Type Leases (Lessor) (Q: 5a,

'Off' the balance sheet Financing: (Q: 1c,

Math 3: Lease versus

Math 4: Lease versus

When is leasing advantageous from a tax viewpoint? (Q: 5c,

• Avoidunintended renewals and lease charges: It is advisable to keep the end of

Unplanned obsolescence All equipment is subject to either functional or

Construction Sale/Leaseback. The other typical type of sale/leaseback transaction, which

 lease payments substantially exceed fair rental value of the property; 

Sale. (Q: 5b, 2010)

or a leaseback to be valid, four tests must be

 Financial leases do not provide for maintenance or service by the

• Hiring a key employee or employees

1. Financial Instruments  Equities: Equities are a type of security that represents

2. Non-financial Instruments  Real estate: With the ever-increasing cost of land,

 Middle Office Investment Bank Services: Middle office investment banking

 Advisory functions: Investment banking serves a potential security issuer in an