Long-Term Notes and Financial Leases

Question 1

Identify the disadvantages of leasing, for long-term financing purposes.

Answer 1

1. Not all assets available for leasing
2. Lease terms may prove different than the period of asset usefulness
3. Often chosen over buying for noneconomic reasons (e.g., convenience)

Question 2

Define “long-term financing”.

Answer 2

Financing provided by those sources of capital funding that do not mature within one year (e.g., long-term notes, financial leases, bonds, preferred stock, and common stock)

Question 3

Identify the advantages of leasing, for long-term financing purposes.

Answer 3

1. Limited immediate cash outlay
2. Possible lower cost than purchasing
3. Possible scheduling of payment s to coincide with cash flows
4. Debt (lease payments) is specific to amount needed

Question 4

Define a “net-net lease”.

Answer 4

Leasee (using party) assumes not only the cost associated with ownership during the life of the lease, including maintenance, taxes, insurance, etc., but also obligation for a residual value at the end of the lease.

Question 5

Define a “net lease”.

Answer 5

Leasee (using party) assumes the cost associated with ownership during the life of the lease, including maintenance, taxes, insurance, etc.

Question 6

Identify the disadvantages of long-term notes, for financing purposes.

Answer 6

Poor credit rating results in higher interest rate, greater security requirements, and more restrictive covenants.
Violation of restrictive covenants can trigger serious consequences.

Question 7

Describe the use of long-term notes, for long-term financing purposes.

Answer 7

Long-term notes are used for borrowings normally of from one to ten years, but some may be of longer duration. Such borrowings usually require collateral, and may have restrictive covenants, but often permit repayment in installment of some period of time