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Questions and Answers
Which characteristic distinguishes debentures from other types of debt instruments?
Which characteristic distinguishes debentures from other types of debt instruments?
- They are primarily used for short-term financing.
- They are always issued by governments.
- They are backed by specific collateral.
- They are backed by the creditworthiness of the issuer. (correct)
Which of the following is true regarding debenture stock holders?
Which of the following is true regarding debenture stock holders?
- They are entitled to a fixed interest payment, regardless of the firm's profit. (correct)
- They are considered owners of the firm.
- Their interest is tied to the firm's overall success and profitability.
- They have voting rights in the company.
What is the primary purpose of lease financing for a company?
What is the primary purpose of lease financing for a company?
- To secure short-term loans using equipment as collateral.
- To use equipment without owning it, facilitating expansion or modernization. (correct)
- To transfer ownership of equipment immediately.
- To avoid paying taxes on equipment.
In a leasing agreement, which party is typically responsible for paying the lessor an agreed-upon sum of money?
In a leasing agreement, which party is typically responsible for paying the lessor an agreed-upon sum of money?
Which of the following entities is NOT directly involved in a typical lease arrangement?
Which of the following entities is NOT directly involved in a typical lease arrangement?
Which characteristic is MOST typical of an operating lease?
Which characteristic is MOST typical of an operating lease?
Why is an operating lease sometimes referred to as a 'maintenance lease' or 'gross lease'?
Why is an operating lease sometimes referred to as a 'maintenance lease' or 'gross lease'?
Which of the following is NOT a characteristic usually associated with a financial lease?
Which of the following is NOT a characteristic usually associated with a financial lease?
In a financial lease, who typically bears the expenses for insurance, installation, and maintenance of the leased equipment?
In a financial lease, who typically bears the expenses for insurance, installation, and maintenance of the leased equipment?
What does the lessee have the OPTION to do at the maturity of a financial lease contract?
What does the lessee have the OPTION to do at the maturity of a financial lease contract?
What is the primary characteristic of a 'sale and leaseback' transaction?
What is the primary characteristic of a 'sale and leaseback' transaction?
What is a MAIN reason for a company to engage in a sale and leaseback transaction?
What is a MAIN reason for a company to engage in a sale and leaseback transaction?
Which of the following BEST describes the term of debentures?
Which of the following BEST describes the term of debentures?
Which parties are typically involved in an operating lease?
Which parties are typically involved in an operating lease?
What is the nature of a financial lease?
What is the nature of a financial lease?
For what types of assets is a sale and leaseback transaction generally done?
For what types of assets is a sale and leaseback transaction generally done?
What is the role of a debenture stock holder in a firm?
What is the role of a debenture stock holder in a firm?
What action does the lessor take in a financial lease?
What action does the lessor take in a financial lease?
Which of the following is a category of debentures mentioned?
Which of the following is a category of debentures mentioned?
What is used as a source of financing company expansion or modernization of the productive apparatus of the firm?
What is used as a source of financing company expansion or modernization of the productive apparatus of the firm?
Flashcards
Debenture
Debenture
A debt instrument not backed by collateral, relying on the issuer's creditworthiness, with terms typically longer than 10 years.
Debenture Stocks
Debenture Stocks
Normally issued under a firm's seal, this represents the legal evidence of a firm's indebtedness.
Lease Financing
Lease Financing
An agreement allowing use of equipment without ownership, important for financing expansion/modernization.
Operating Lease
Operating Lease
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Financial Lease
Financial Lease
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Sale and Leaseback
Sale and Leaseback
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Study Notes
Debenture Stocks
- Corporate bonds, not backed by collateral, with terms generally exceeding 10 years
- Supported by the issuer's creditworthiness and reputation
- Corporations and governments use them to raise capital
Categories of Debentures
- All banks debentures
- Involves a direct relationship between a bank and a firm, with lending based on assets
- Debenture Stocks/Corporate Bonds
- Usually issued under a firm's seal and represent legal evidence of a firm's indebtedness
Debenture Stock Holders
- They are creditors entitled to fixed interest payments, regardless of the firm's profitability
- They have no voting rights
- Limited interest to the fixed interest payment
Lease Financing
- A significant source of long-term funds used for expansion/modernization through leasing
- Allows companies to use equipment without owning it, to put a plant or any fixed asset at the disposal of a firm while the company pays the lessor adequate sum of money which constitutes cost on the part of the firm
Units Involved in Lease
- A company which aims to expand capacity or requires equipment for modernization
- A specialized equipment manufacturer
- A company that buys equipment from the manufacturer/supplier and leasing said equipment to other companies
Types of Leases
- Operating lease
- Financial lease
- Sale and leaseback
Operating Lease
- Involves the supplier/lessor and the lessee, where the supplier is also the manufacturer
- Short-term leasing contract
Characteristics of Operating Lease
- Short-term duration
- Either party can terminate after a month's notice
- The supplier covers ownership and operational expenses, including equipment maintenance
- The lessee pays rent to cover depreciation, maintenance, and profit margin, sometimes called 'maintenance leasing' or 'gross leasing'
- It permits the use of an asset without transferring ownership rights
Financial Lease
- Medium to long-term contract mainly for movable property equipment leasing
- This involves the producer, lessor, and lessee without direct connection between the producer and the lessee
- The producer specializes in manufacturing
- The lessor is often a financial institution
- The lessee is usually a small-scale industry
Finance Lease Details
- Transfers asset ownership after completion, and the lessor meets all obligations
- The lessor buys and provides equipment
- The lessee makes fixed periodic payments exceeding the equipment cost
Characteristics of Financial Lease
- Lessee typically covers insurance, installation, maintenance, and repair expenses, considered 'Net Leasing'
- The contract duration is based on the equipment's technical/economic life
- Usually involves highly specialized equipment
- The leasing contract is difficult to terminate unless the lessee pays the remaining payments in advance, interest applied
Options at Contract Maturity
- Renew the contract with lower payments
- Return the scrap
- Pay the asset's residual value to take ownership
Sale and Leaseback
- Financial transaction where an asset is sold and then leased back for the long-term, continuing its use without ownership
- Commonly used for fixed assets like real estate, planes, trains, and automobiles
- Includes reasons like financing, accounting, and taxing
Leaseback Arrangements
- The new owner enters into a long-term agreement, leasing the property back to the seller at an agreed rate
- Used to transfer ownership to a holding company while monitoring asset value or to raise money by selling a valuable asset for long-term investment
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