--%>

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 : Discretion can distort results Discuss

    Discuss how management’s discretion in applying accounting rules can mislead investors. Provide three examples and how the discretion can distort results?

  • Q : Why classical option pricing required

    Why classical option pricing with constant volatility required?

  • Q : Explain Cost of capital aspect Cost of

    Cost of capital aspect: Estimation of WCR is beneficial from the point of view of cost of capital too. A sound working capital position is beneficial from the point of view of both owners and lenders of the company. A sufficiently positive position me

  • Q : Which method must use to valuate young

    Which method must we use to valuate young companies along with high growth but uncertain futures? Two illustrations were Boston Chicken and Telepizza while they began.

  • Q : Does the book value of the debt

    Does the book value of the debt all the time coincide with its market value?

  • Q : Estimate stock's current price A

    A company currently pays a dividend of $3.75 per share, D0 = 3.75. It is estimated that the company's dividend will grow at a rate of 15% percent per year for the next 2 years, then the dividend will grow at a constant rate of 7% the

  • Q : Bank assignment You have just been

    You have just been hired as the branch manager for a big bank in XYZ. You were told that the bank is going to open a new branch at Island Learning Centre of the Open University of XYZ. The management of the bank is much concerned that the new branch might not be able

  • 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

  • Q : Leverage ratio problem Handy Inc has

    Handy Inc has debt-to-assets ratio of 40%, tax rate of 35%, and total value of $100 million. W. C. Handy, the CFO, would like to increase the leverage ratio to 42%, and he believes that there will be no change in the bankruptcy cost of the company. How many dollars wo

  • Q : Describe nominal gross domestic product

    Nominal gross domestic product: If GDP of a particular year is estimated on the base of price of similar year, it is termed as nominal GDP.