--%>

Types of lease contracts

What are the types of lease contracts which are seen in practice?

E

Expert

Verified

Many types of lease contracts are seen in practice, some of popular ones are as follows:

Financial Lease: This type of lease contract extends over the whole useful life of an asset and it cannot be cancelled before the lease period expires. The legal ownership of the asset is although not transferred. In these types of lease the duration of the lease contract is almost equal to the useful life of the asset. Thus the whole investment is recovered by the lesser. In a Finance Lease the lessee may be given an option to purchase the asset at the expiration of the Lease period. In financial lease, the maintenance and other related expenses are normally borne by the lessee as well as the risk of obsolescence. The asset given on lease to lessee is of specialised nature and can only be used by the lessee without major modification.

Operating Lease: This type of lease is such in which the asset is leased for a short period. In an operating lease the contract is cancellable during the term of lease. The period of lease in such types of leases is shorter than the asset’s economic life. In other words, an operating lease is not a Finance Lease. In this type of lease a single lease covers a period which is shorter than the useful life of the asset and therefore the original cost of the asset cannot be recovered in a single lease. Here the risk of obsolescence remains with the lesser and he is also responsible for the insurance and other expenses. Since the period of the lease is shorter therefore the lease rentals will be greater. Such types of leases are preferred when the asset is likely to become obsolete within a short period.

The suitable lease option would be financing lease for Paulo’s restaurant since Paulo would be using the assets for a rather long period and also the assets are not prone to become obsolete within a short period.

   Related Questions in Corporate Finance

  • Q : Applied approaches to theory development

    Discuss and distinguish between the following applied approaches to theory development:  true-income (income statement and balance sheet approaches), efficient markets, and predictive ability.  You may want to include in your discussion any articles or studies that either supported or u

  • Q : Determine weighting of shares done and

    When computing the WACC, is the weighting of the shares done and the debt with book values of debt and shareholder’s equity or along with market values?

  • Q : Problem on common stock The AB Corp

    The AB Corp stock has a β of 1.15 and it will pay a dividend of $2.50 next year. The expected rate of return of the market is 17% and the current riskless rate is 9%. The expected rate of progress of AB is 4%. Find the value of its common stock.

  • Q : Benefits of working capital requirement

    Benefits of working capital requirement estimation: • Helps to judge the efficiency of utilization of working capital in generation of sales • Cost of capital aspect

  • Q : Variance of a portfolio The variance of

    The variance of a portfolio of 40 stocks will be the addition of _______ variance terms and _______ covariance terms. A) 40; 1560B) 40; 1600C) 80; 40D) 1600; 40

  • Q : Explain company creates value for its

    Is this true that a company creates value for its shareholders in a year when this distributes dividends or when the quotation of the shares increases?

  • Q : Affect the value of the stock Is the

     Is the value of this stock dependent on how long you plan to hold it? In other words, if your planned holding period were 2 years or 5 years rather than 3 years, would this affect the value of the stock today, P0? Explain your answer.<

  • Q : Explain the working of breakthrough for

    Explain the working of breakthrough in low-discrepancy sequences used for option valuation.

  • Q : Sinking Fund problem Berks Corporation

    Berks Corporation is expecting to have EBIT next year of $12 million, with a standard deviation of $6 million. Berks have $30 million in bonds with coupon of 10%, selling at par, which are being retired at the rate of $2 million annually. Berks also have 100,000 share

  • Q : Benefits of Cash to cash analysis

    Benefits of Cash to cash analysis: The benefits of Cash to cash analysis are as following: 1. Helps in better cash management situation thus, increasing liquidity. 2. The cash a