What effect does leasing have on a firms balance sheet

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Reference no: EM133760627

Assignment: Financial Mini Case

Full order description: Read the case (see attached): As an alternative to the borrow-and-buy plan, the equipment manufacturer informed Lewis that Consolidated Leasing would be willing to write a 4-year guideline lease on the equipment, including maintenance, for payments of $260,000 at the beginning of each year. Lewis's marginal federal-plus-state tax rate is 25%. You have been asked to analyze the lease-versus-purchase decision and, in the process, to answer the following questions.

A. Who are the two parties to a lease transaction?

B. What are the four primary types of leases, and what are their characteristics?

C. How are leases classified for tax purposes?

D. What effect does leasing have on a firm's balance sheet?

E. What effect does leasing have on a firm's capital structure?

F. What is the present value of owning the equipment? (Hint: Set up a time line that shows the net cash flows over the period t = 0 to t = 4, and then find the PV of these net cash flows, or the PV of owning.)

G. What is the discount rate for the cash flows of owning?

H. What is Lewis's present value of leasing the equipment?

Reference no: EM133760627

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