Introduction to Corporate Finance

14: Long-Term Debt and Leasing

■ Leasing serves as an alternative to

borrowing funds to purchase an asset.

Operating leases are described in a

footnote to a company’s balance sheet,

whereas finance lease obligations must be

shown on the balance sheet as an asset and

corresponding liability. Companies often

make lease-versus-purchase decisions,

which involve choosing the alternative with

the lower present value of cash outflows.

■ Leasing affects a company’s future financing

ability. Financial analysts view leases as long-

term financial commitments. A variety of

advantages and disadvantages of leasing are

commonly cited.

KEY TERMS

balloon payment, 505

bank-accepted commercial

bill, 509

bearer bonds, 514

call premium, 516

collateral, 505

convertible bonds, 512

covered bonds, 509

cross-default covenant, 502

debentures, 509

direct lease, 521

Eurobond, 514

Eurocurrency loan market, 506

fallen angels, 513

finance lease, 520

fixed-rate offerings, 501

floating-rate issues, 501

foreign bond, 514

high-yield bonds, 513

income bonds, 509

indenture, 510

investment-grade bonds, 513

junk bonds, 513

lease-versus-purchase (or lease-

versus-buy) decision, 521

leasing, 519

lessee, 519

lessor, 519

leveraged lease, 521

lien, 505

loans, 501

loan covenants, 501

maintenance clause, 521

operating lease, 520

private placements, 501

project finance (PF) loans, 507

purchase option, 521

refund, 515

renewal option, 521

sale-leaseback arrangement, 521

serial bonds, 515

share purchase warrants, 505

sinking fund, 510

speculative bonds, 513

stand-alone companies, 507

subordinated bond, 509

subordination, 502

syndicated loan, 506

term loan, 504

trustee (bond), 511

SELF-TEST PROBLEMS

Answers to Self-test problems and the Concept review questions throughout the chapter appear on

CourseMate with SmartFinance Tools at http://www.login.cengagebrain.com.

ST14-1 The initial proceeds per bond, the size of the issue, the initial maturity of the bond and the years

remaining to maturity are shown in the following table for a number of bonds. Each bond has a

$1,000 face value, and the issuing company is in the 35% tax bracket.

Bond Proceeds per bond Size of issue Initial maturity of bond Years remaining to maturity

A $ 975 50,000 bonds 10 years 5 years

B 1,020 25,000 20 15

C 1,000 100,000 25 12

a Indicate whether each bond was sold at a discount, at a premium, or at its face value.

b Determine the total discount or premium for each issue.

c Determine the annual amount of discount or premium amortised for each bond.

LO14.5

LO14.6