Help: Schweser-SS10-page222

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reema

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Professor's note:
The implicit interest rate in the lease is the discount rate that the lessor used to determine the lease payments. It is the lease's internal rate of return because it is the interest tate that equates the present value of lease payments to the fair value of the leased asset. Using the lower of the two discount rates....

Can someone explain whats meant by this??? What are the two discount rates here??

Also im finding this particular topic.."lease and Off balance sheet debt" a lil tough then what is covered in FSA so far....does anyone share the same eor does it mean im worked up ?
 
The other rate probably being discussed is the lessee's borrowing rate. This is for determining whether it is a capital lease, right? I'll bet that in the previous paragraph they are talking about the rate at which the lessee can borrow money.
 
reema, if you can get in on a John Harris workshop. Not sure if he has any online products but it's well worth it. I had him for 1 day at the SSFA seminar in Windsor and I felt more confident about FSA after that one day.
 
By consensus SS10 is the most ugly part of FSA -you only have to search old AF posts to know what I mean.



Edited 1 time(s). Last edit at Monday, June 18, 2007 at 10:56AM by Dsylexic.
 
But this part isn't ugly. It's just that when you decide whether a lease is a capital lease or an operating lease you discount the lease payments by the lesser of the rate at which the person who gets the backhoe can borrow money or by the IRR of the lease. This lease stuff is pretty straightforward I think.

OBS finance stuff is, as you say, infinitely ugly.
 
Just to add to what Joey said:

Suppose the company's overall borowing rate is 10% and the lease rate is 11%, then use 10% to calculate the PV. BUT...Remember to calculate the lease nterest expense using 11%.*PV .. Maybe very obvious --but just for the record.
 
I had a simmilar problem, but if you continue further through SS10, you'll get to the lease treatment of lessor and then the implicit rate is explained in more detail

2 lypes of capital leases for lessor

Sales-type: Here the implicit rate is the rate that equates the PV of lease payments to the selling price

Direct Financing lease: Here the implicit rate is the rate that equates the PV of lease payments to the Cost of the leased equipment

The other rate that Schwesser is talking about is the incremental / marginal financing cost of the LESSEE.

We use the lower of the two.



Edited 1 time(s). Last edit at Monday, June 18, 2007 at 11:35AM by delhirocks.
 
That helps. Thank you !!

And i agree that OBS is all the more crappy. And Schweser talks about analyst adjustment without really showing the initial impact on the statements.
 
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