24 Energy Project Financing: Resources and Strategies for Success
stock. Alternatively, PizzaCo could capitalize the dividend payments,
which means setting aside enough money so the dividends could be
paid with the interest generated.
Table 2-7 shows the economic analysis for issuing stock at a 16%
cost of equity capital, then repurchasing the stock at the end of year
five. (For consistency of comparison to the other arrangements, the stock
price does not change during the contract.) Like a loan or bond, Piz-
zaCo owns and maintains the asset. Thus, the annual savings are only
$950,000. PizzaCo pays annual dividends worth $400,000. At the end of
year 5, PizzaCo expects to sell the asset for $1,200,000.
Note that Table 2-7 is slightly different from the other tables in
this chapter:
Taxable Income = Savings – Depreciation, and
ATCF = Savings – Stock Repurchases - Dividends - TaxLeases
Firms generally own assets, however it is the use of these assets
that is important, not the ownership. Leasing is another way of obtain-
ing the use of assets. There are numerous types of leasing arrangements,
ranging from basic rental agreements to extended payment plans for
purchases. Leasing is used for nearly one-third of all equipment utiliza-
tion.^12 Leases can be structured and approved very quickly, even within
48 hours. Table 2-8 lists some additional reasons why leasing can be an
attractive arrangement for the lessee.
Basically, there are two types of leases: the “true lease” (a.k.a.
“operating” or “guideline lease”) and the “capital lease.” One of the
primary differences between a true lease and a capital lease is the tax
treatment. In a true lease, the lessor owns the equipment and receives
the depreciation benefits. However, the lessee can claim the entire lease
payment as a tax-deductible business expense. In a capital lease, the
lessee (PizzaCo) owns and depreciates the equipment. However, only
the interest portion of the lease payment is tax-deductible. In general, a
true lease is effective for a short-term project, where the company does
not plan to use the equipment when the project ends. A capital lease is
effective for long-term equipment.The True Lease
Figure 2-10 illustrates the legal differences between a true lease
and a capital lease.^13 A true lease (or operating lease) is strictly a rental