Professional Documents
Culture Documents
Term Loans
and Leases
21-1
21-2
Term Loans
Provisions of Loan Agreements
Equipment Financing
Lease Financing
Evaluating Lease Financing in
Relation to Debt Financing
Term Loans
Term Loan -- Debt originally scheduled
for repayment in more than 1 year, but
generally in less than 10 years.
21-3
21-4
The interest rate is higher than on a shortterm loan to the same borrower (25 to 50
basis points on a low risk borrower).
Interest rates are either (1) fixed or (2)
variable depending on changing market
conditions -- possibly with a floor or ceiling.
Borrower is also required to pay legal
expenses (loan agreement) and a
commitment fee (25 to 75 basis points) may
be imposed on the unused portion.
21-5
Revolving Credit
Agreements
Revolving Credit Agreement -- A formal, legal
commitment to extend credit up to some
maximum amount over a stated period of time.
21-6
Insurance
Company Term Loans
21-7
Medium-Term Note
Medium-Term Note (MTN) -- A corporate or government
debt instrument that is offered to investors on a
continuous basis.
Provisions of
Loan Agreements
Loan Agreement -- A legal agreement
specifying the terms of a loan and the
obligations of the borrower.
21-9
Formulation of Provisions
The important protective covenants*
covenants fall into
three different categories.
21-10
Frequent
General Provisions
21-11
Frequent
Routine Provisions
21-12
Equipment Financing
21-13
21-14
21-15
Lease Financing
Lease -- A contract under which one party, the
lessor (owner) of an asset, agrees to grant the
use of that asset to another, the lessee, in
exchange for periodic rental payments.
Advantage:
Advantage Use of an asset without
purchasing the asset
Obligation:
Obligation Make periodic lease payments
Contract specifies who maintains the asset
21-17
Types of Leasing
Sale and Leaseback -- The sale of an asset with
the agreement to immediately lease it back for
an extended period of time.
Lessors:
Lessors insurance companies, institutional
investors, finance companies, and independent
companies.
21-18
Types of Leasing
Direct Leasing -- Under direct leasing a firm
acquires the use of an asset it did not
previously own.
Lessors:
Lessors manufacturers, finance companies,
banks, independent leasing companies, specialpurpose leasing companies, and partnerships.
21-19
Types of Leasing
Leverage Leasing -- A lease arrangement in which the
lessor provides an equity portion (usually 20 to 40
percent) of the leased assets cost and third-party
lenders provide the balance of the financing.
21-20
21-21
Economic Rationale
for Leasing
21-22
Should I Lease
or Should I Buy?
Analyze cash flows and determine which
alternative has the lowest (present value) cost
to the firm.
Example:
21-23
Should I Lease
or Should I Buy?
21-24
Should I Lease
or Should I Buy?
21-25
11%
L
L
L
L
L
L
L
This is an annuity due that equals $74,000 today.
$74,000.00 = L (PVIFA 11%,
11
11% 7) (1.11)
$66,666.67 = L (4.712)
$14,148.27 = L
21-26
11
74,000
I/Y
PV
PMT
FV
-14147.68
L
B
L
B
3
L
B
L
B
L
B
L
B
$ 14,148.27
$ -5,659.31
21-29
21-30
12%
TL
TL
TL
TL
TL
TL
TL
This is an annuity due that equals $74,000 today.
$74,000.00 = TL (PVIFA 12%,
12
12% 7) (1.12)
$66,071.43 = TL (4.564)
$14,477.42 = TL
21-31
12
74,000
I/Y
PV
PMT
FV
-14477.42
Loan
Payment
Loan
Balance*
Balance
Annual
Interest
0
1
2
3
4
5
6
$14,477.42
14,477.42
14,477.42
14,477.42
14,477.42
14,477.42
14,477.43
$59,522.58
52,187.87
43,972.99
34,772.33
24,467.59
12,926.28
0
--$7,142.71
6,262.54
5,276.76
4,172.68
2,936.11
1,551.15
21-33
Remember -- Amortization
Functions of the Calculator
Press:
2nd
Amort
ENTER
ENTER
Results*:
21-34
BAL = 52,187.87
PRN = -7,334.71
INT =
-7,142.71
21-35
0
14,800.00
23,680.00
14,208.00
8,524.80
8,524.80
4,262.40
0
Tax-Shield
Benefits**
Benefits
--$ 8,777.08
11,977.02
7,793.90
5,078.99
4,584.36
2,325.42
-3,000.00***
*
Based on schedule given on Slide 21-25.
** .4 x (annual interest + annual depreciation).
*** Tax due to recover salvage value, $7,500 x .4.
21-36
Cash
Outflow*
Outflow
Present
Value**
Value
$14,477.42
--$14,477.42 $14,477.42
14,477.42 $ 8,777.08
5,700.34
5,317.48
14,477.42
11,977.02
2,500.40
2,175.80
14,477.42
7,793.90
6,683.52
5,425.26
14,477.42
5,078.99
9,398.43
7,116.66
14,477.42
4,584.36
9,893.06
6,988.06
14,477.43
2,325.42 12,152.01
8,007.18
- 7,500.00*** -3,000.00 - 4,500.00 - 2,765.98
*
Loan payment - tax-shield benefit.
** Present value of the cash outflow discounted at 7.2%.
*** Salvage value that is recovered when owned.
21-37