mfs sumit leasing
TRANSCRIPT
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WHAT IS LEASING?
y A lease is a contract between the owner of an asset (the
Lessor) and the party desiring to use that asset (the Lessee).
y Economic use of an asset for a certain period of time and
involving a series of fixed payments called Lease Rentals.
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Leases provide for the following terms:
y The lessor allows the lessee the unrestricted right
to use the asset during the lease term
y The lessee agrees to make periodic payments to
the lessor and to maintain the asset
y T itle to the asset remains with the lessor , who
usually retakes possession of the asset at theconclusion of the lease.
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FEATURES OF LEASING
y Leasing a product is similar to renting it
y A lease contract lasts over a number of years, usually
between 2 and 10 years (depending on the cost and usable
life of the produc
t)y Lease allows the f ull use of a piece of equipment without
having to pay the f ull cost of the item in one go
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Understanding the Leasing
Case Study
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To Lease or Not?
y Sumit Projects Ltd. - Ahmedabad
y Specialize in Construction
y For bidding, high liquidity required - 90 per 100 rupees
y Sales increasing year on year, hence new equipment worth
Rs. 120 lacs required in addition to existing equipment
worth Rs. 45 lacs
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Options
y Option 1: Sale and Lease Back
y Sale and Lease back at operating terms at 15%
y Option 2: Operating Lease
y Leasing from a Leasing company at 14%, but not accounting for
the assets on balance sheets
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Options
y Option 3: Finance Leasing
y Leasing from a leasing company, but includes tax savings and
assets are treated as company·s assets
y Option 4: Buying Assets on Loan
y Loan for buying assets, though reduces liquidity
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TYPES OF LEASE
1) Financial Lease (Capital Lease)
2) Operating Lease
3) Sale and Lease Back4) Leveraged Leasing
5) Direct Leasing
6) Import Leasing
7) Cross Border Leasing
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y C apital lease -(purchase) lessee essentially owns the property. Lessee
records the leased asset in the balance sheet (i.e. capitalized)
together with the corresponding lease obligation.
y O perating lease ² (rental) lessee rents the property. Lessee accrues
rent expense.
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Direct Lease
y The lessee and the owner of the asset are two different
entities.
yLessor lease the asset to the lessee.
y It is of 2 types:
y Bipartite Lease
y Tripartite Lease
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Bipartite Lease
y It involves 2 parties:
y Equipment supplier cum lessor
y
Lesseey It is like an operating lease with in built facilities like:
y Upgrade Lease: Upgradation of equipment (asset)
y Addition to the original configuration.
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Tripartite Lease
y It constitutes of 3 parties:
y Equipment supplier
y
Lessory Lessee
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Single Investor Lease
y 2 parties involved are:
y Lessor
y
Lesseey Lessor funds the entire investment by an appropriate mix of
debt and equity funds.
y Lessee is not entitled to pay in case of defaults in servicing
the debt by the lessor.
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Leveraged Lease
y 3 parties are involved:
y Lessor (equity investor)
y
Lendery Lessee
y Lessor buys the asset through substantial borrowing.
y The lender obtains an assignment of the lease and provides
the debt component for the balance amount required and it isthe major portion of the total cost.
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Import and Cross Border Lease
y Import Lease is one in which both Lessor and Lessee are
based in the same country, but the equipment is
imported
y Cross Border Lease is one in which Lessor and Lessee are
based in different countries
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STANDARD LEASE OPERATION
Sundaram
Finance
Sumit
Construction
Tata Motors ²
commercial
vehicles
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STEPS IN LEASING
y The entrepreneur chooses the equipment and the
equipment supplier.
y The supplier provides a quotation.
y
The lessee submits an application to the lessor.y The lessor evaluates the application.
y The lessor and lessee sign a lease contract.
y The lessee pays the advance lease payment.
y The lessor orders the equipment from the supplier.
y The supplier delivers the equipment.
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y The lessor registers and insures the equipment.
y The supplier provides after-sales services as per contract.
y The lessee maintains the equipment (routine mantainence).
y The lessor monitors the lease operation
y The lessee pays instalments as per contract
y At the end of the lease period, the lessee either returns the
equipment or exercises the option of purchase.
y
If the option is purc
hase,
the lessee pays the agreed final su
mand the lessor transfers the ownership of the equipment to
the lessee.
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ADVANTAGES
OF
LEASING
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Operational advantages to the lessee:
y Leasing ready-to-use equipment may be more attractive if
the asset requires lengthy preparation and set-up.
y
Leasing avoids having to own the asset that will be requiredonly seasonally, temporarily or sporadically.
y Leasing for short periods provides protection against
obsolescence.
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Financial advantages to the lessee:
y Lease payments can be tailored to suit the lessee's cash
flows (up to 100% financing, instead of the 80% limit by
banks).y Properly structured leases may be ´off-balance sheetµ,
avoiding restrictions set by bondholders that prevent firm
from taking on additional debt.
y
Leasing provides tax advantages from accelerateddepreciation and interest expense.
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DISADVANTAGES
OF
LEASING
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Disadvantages to the lessee:
y Leased ready-to-use equipment may be of lower quality
than custom built, resulting in lower quality products
and lower sales.S
easonal leasing may affec
t equipmentavailability and pricing. Premium must be paid for the
protection against obsolescence.
Disadvantages to financial statement users:
y Off-balance sheet finan
c
ing hides the tru
e leverage of the firm.
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Option Valuation f or CaseSale and Lease
back-
operating
Operating
Lease
Finance
Lease
Loan
Increased Liquidity Liquidity and option
for new Equipments
Increased Liquidity Less Liquidity due
to down payment
No Risk and
maintenance involved
No Risk and
maintenance involved
Risk and
Maintenance cost
involved
No Risk and
maintenance
involved
No assets on Balancesheet
No assets on Balancesheet
Assets on Balancesheet
Assets on Balancesheet
No tax Shield No tax Shield Tax Shield Tax Shield
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Evaluation of Alternatives
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Sale and Lease Back
y Assumptions
y Lease Equipments -120 lacs
y Equipment Life - 6 yrs
y Lease Period ² 3 yrs
y Usage Value ² 60 lacs (by SLM)
y Tax Rate ² 30%
y
Interest Rate - 15%
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Sale and Lease Back
y Based on PVIFA, annuity is calculated as 26.28 lacs per year
for three years
y The net cash outflow for this leasing is 64.76 lacs
y
Thecash flow due to selling of equipment is also taken into
account
y Here, maintenance and technology costs are incurred by
Lessor
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Operating Leasing
y Assumptions
y Lease Equipments -120 lacs
y Equipment Life - 6 yrs
y Lease Period ² 3 yrs
y Usage Value ² 60 lacs (by SLM)
y Tax Rate ² 30%
y
Interest Rate - 14%
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Operating Leasing
y Based on PVIFA, annuity is calculated as 25.85 lacs per year
for three years
y The net cash outflow for this leasing is 64.28 lacs
y
Thecash flow due to selling of equipment is also taken into
account
y Here, maintenance and technology costs are incurred by
Lessor
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Finance Lease
y Assumptions
y Lease Equipments -120 lacs
y Equipment Life - 6 yrs
y Lease Period ² 5 yrs
y Usage Value ² 100 lacs (by SLM)
y Tax Rate ² 30%
y
Interest Rate - 17%
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Finance Lease
y Based on PVIFA, annuity is calculated as 31.26 lacs per year
for five years
y The net cash outflow for this leasing is 79.08 lacs for 5 years
and 52.64 lacs for three year period
y The cash flow due to selling of equipment is also taken into
account
y Here, maintenance and technology costs are incurred by
Lessee
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Loan
y Assumptions
y Equipment cost -120 lacs
y Loan ² 100 lacs
y Down payment ² 20 lacs
y Equipment Life - 6 yrs
y Loan Period ² 5 yrs
y Tax Rate ² 30%
y Interest Rate - 11%
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Loan
y Based on PVIFA, annuity is calculated as 27.06 lacs per year
for five years
y The asset is on Lessee·s balance sheet and depreciation and
tax benefits are considered for calculating the NPV
y Down payment reduces the liquidity
y The net cash outflow for this leasing is 82.06 lacs and 47.38
lacs for three year time period
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Other Options
y Import Leasing: Can consider if technology required is not
available locally, or costs are saved by better technology
y Cross Border Leasing: Can
c
onsider this option if company does not have any Lessor providing technology
required in same country, or cost with foreign Lessor are less
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Risks Associated with Leasing
y Transportation Leasing
y Non payment of rentals
y Non payment of Equipment cost by Leasing company
yTechnology risk
y Foreign Exchange risk (Cross Border Leasing)
y Non performance of goods -Warranty
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Recommendation
y It would have been better to go for financial leasing, as it
would have had lower cost, and have provided tax shield.
y Also, as assets were on company·s balance sheet, additional
funds could have been generated through private stocks
y Also, Company would have more say in choosing the
technology of equipments