Ross et al.: Fundamentals

of Corporate Finance, Sixth

Edition, Alternate Edition

VIII. Topics in Corporate

Finance

(^896) 26. Leasing © The McGraw−Hill
Companies, 2002

CHAPTER

26

Leasing

In August 2001,a deal was announced between GE Capital Aviation Services

and China Southwest Airlines in which GE Capital would lease nine Boeing B737

jets to China Southwest. On the same day, a spokesperson for Singapore Airlines

announced the purchase of three Boeing B777 planes. The list prices on these

aircraft? A Boeing B737 will set you back a cool $46.5 to $64.5 million, while

prices for the newer, bigger 777 begin at $152 million! These transactions raise

a number of issues. With such expensive assets, why would one company

choose to lease and another choose to buy? And why is GE Capital, which does

not manufacture aircraft, in the business of leasing them to airlines? This chapter

provides answers to these and other questions associated with leasing.

easing is a way businesses finance plant, property, and equipment.^1 Just about any

asset that can be purchased can be leased, and there are many good reasons for

leasing. For example, when we take vacations or business trips, renting a car for a

few days is a convenient thing to do. After all, buying a car and selling it a week

later would be a great nuisance. We discuss additional reasons for leasing in the sections

that follow.

Although corporations engage in both short-term leasing and long-term leasing, this

chapter is primarily concerned with long-term leasing, where long-term typically means

more than five years. As we will discuss in greater detail shortly, leasing an asset on a

long-term basis is much like borrowing the needed funds and simply buying the asset.

Thus, long-term leasing is a form of financing much like long-term debt. When is leas-

ing preferable to long-term borrowing? This is a question we seek to answer in this

chapter.^2

L

Up-to-date news and

articles on the leasing

industry are available at

http://www.monitordaily.com.

(^1) We are indebted to James Johnson of Northern Illinois University for helpful comments and suggestions on
this chapter.
(^2) Our discussion of lease valuation is drawn, in part, from Chapter 24 of S. A. Ross, R. W. Westerfield, and
J. F. Jaffe, Corporate Finance,6th ed. (New York: McGraw-Hill, 2002), which contains a more
comprehensive treatment and discusses some subtle, but important, issues that are not covered here.
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