--%>

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 : Financial statements The concept of

    The concept of conservatism has been influential in the development of accounting theory and practice.  A major effect of conservatism is that accountants tend to recognize losses but not gains.  For example, when the value of an asset is impaired, it is wri

  • Q : Zurich Pvt Ltd. You have joined Zurich

    You have joined Zurich Pvt. Ltd as a Finance manager. You are given the following information: Zurich Pvt Ltd. is a diversified manufacturing firm dealing with electrical appliances. In 2012, the firm reported an operating income of Rs. 857.60 million and faced a tax rate of 35% on income. The firm

  • Q : Is Capital Cash Flow identical with

    Is Capital Cash Flow identical with Free Cash Flow?

  • Q : Who described option pricing with

    Who described option pricing with deterministic volatility?

  • Q : Mm ase Study 1 You work in Walt Disney

    ase Study 1 You work in Walt Disney Company's corporate finance and treasury department and have just been assigned to the team estimating later today. You quickly realize that the information you need is readily available online. 1) Go to http://finance.yahoo.com. under " Market Summary," you will

  • Q : Is it correct to use valuation of

    Is this correct to use in the valuation of the shares of a certain company the “the real net assets value” which, as per to the Institute of Accounting and Auditing (ICAC), shows the “book value of shareholder’s equity, corrected through increa

  • 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 : PV of Dividends PV of dividends:

    PV of dividends: Cortez, Inc., is expecting to pay out a dividend of $2.50 next year. After that it expects its dividend to grow at 7 percent for the next four years. What is the present value of dividends over the next five-year period if the required rate of return is 10 percent?

  • Q : Active versus Passive fund managers

    Active vs. Passive fund managers: Passive fund managers adopt a long term buy and hold strategy. Usually, stocks are purchased so that the portfolio’s returns will track those of an

  • Q : Explain undervaluation of share on the

    Suppose we calculate g as ROE (1–p)/(1–ROE (1–p)) and the Ke by the CAPM. We replace both values into the formula PER = (ROE (1+g) – g)/ROE (Ke-g) but there PER we obtain is fully different from the one we get by dividing the quotation of the s