Question

In: Finance

Would higher residual value risk make a company more or less likely to lease an asset?...

Would higher residual value risk make a company more or less likely to lease an asset? Why?

Solutions

Expert Solution

Residual value is defined as the value that a tangible asset is expected to realize on sale or disposition at the end of its useful life. Residual value risk is defined as the possibility that the leased asset would be resold or re-leased at a price that is less than its residual value. This risk equals the difference in residual value of the leased asset & the lower salvage value that is realized upon disposal or re-lease at the end of the term & is usually borne by the lessor.

As the economics of the lease depend on the leased asset’s residual value in addition to other sources of repayment, it is leasing that exposes the lessors to more residual value risk than any other types of lending.

Hence the company which leases its asset to its clients has to bear the residual value risk. Therefore it can be concluded that a higher residual value risk may make a company less likely to lease an asset to its clients.

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

Explain whether the following make collusion more or less likely and why. a) Higher interest rates...
Explain whether the following make collusion more or less likely and why. a) Higher interest rates b) Less frequent interaction between competitors c) Growing profits in the industry d) A firm on the verge of bankruptcy e) A new competitor entering the market
1. On a depreciating asset most likely the insurance premium would be higher for A A...
1. On a depreciating asset most likely the insurance premium would be higher for A A replacement cost policy B A value based policy C This make no difference D High deductible policy 2. Named perils in an insurance policy A State the exact things that are covered B State broad situations that are covered but are not specific C Are the same as exclusions D Are not permitted in construction 3. All insurance companies are the same and there...
1. On a depreciating asset most likely the insurance premium would be higher for A A...
1. On a depreciating asset most likely the insurance premium would be higher for A A replacement cost policy B A value based policy C This make no difference D High deductible policy 2. High insurance deductible usually means: A lower premiums B Higher premiums C No difference in premium D you are willing to take on more risk 3. Evaluating insurance coverage needs involves A Looking at the costs verses the potential for exposure B Only getting coverage that...
Which of the following events would make it more likely that a company would call its...
Which of the following events would make it more likely that a company would call its outstanding callable bonds? Market interest rates decline sharply. The company’s bonds are downgraded. The company's financial situation deteriorates significantly. Market interest rates rise sharply. Inflation increases significantly.
If an asset is sold (market value) for more or less than its book value that...
If an asset is sold (market value) for more or less than its book value that used for tax purposes, and adjustment must be made to the taxable income during the year. How this difference in market value and book value affect the taxable income?
What is a risk of an operating lease when compared to a finance lease? - Higher...
What is a risk of an operating lease when compared to a finance lease? - Higher administration costs - No depreciation can be claimed - Must provide maintenance - Must provide insurance A company is evaluating methods of raising capital to fund a massive new IT infrastructure project. Which financing strategy includes costs that could be deducted on the company’s corporate tax return? - Authorizing new shares of common stock - Issuing corporate bonds - Issuing a new series of...
Would it be better to buy or lease and asset for a company? In each scenerio...
Would it be better to buy or lease and asset for a company? In each scenerio (lease/ buy) explain how each would affect the finacials.
Give some examples of specific securities that would be more likely found on the asset side...
Give some examples of specific securities that would be more likely found on the asset side of a balance sheet of a life insurance company and those that would be more likely found on the asset side of the balance sheet of a property and casualty company. What is the reason that all U.S. states have insurance commissions? What do such commissions do?
Would an industry where firms can easily and quickly increase capacity be more or less likely...
Would an industry where firms can easily and quickly increase capacity be more or less likely to collude relative to an industry where capacity growth takes longer? Explain using ideas about collusion
Consider Asset A and B, which asset has higher systematic risk? Which one has higher total...
Consider Asset A and B, which asset has higher systematic risk? Which one has higher total risk? Show your calculations. Assume the market risk premium is 8 percent, the risk-free rate is 4 percent, and the capital asset pricing model holds. (Rounding your answers to four decimal places) State of Economy Probability of State of Economy Rate of Return if State Occurs Asset A Asset B Recession 0.10 0.02 -0.25 Normal 0.70 0.25 0.09 Irrational exuberance 0.20 0.05 0.40
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT