Financial Lease and Operating Lease - Essay Example

Definition of financial lease and operating lease. Financial lease is one way to leverage assets. It is eventually a kind of method that allows business to acquire equipment or resources with a corresponding payment that is set to a certain structure over time. This allows a certain individual to own or make use of a certain asset while payment on it continues over the set or agreed term. On the other hand, the operating lease allows the use of an asset, but the rights and ownership of it is way far from being owned by the agreed term. Unlike financial lease, operating lease does not allow the business to acquire equipment or resources with a corresponding payment that is set to a certain structure over time. 2. When it makes sense to lease versus own? Leasing makes sense when one will try to look at it from the point of view of saving. If it is substantial to generate saving with leasing, then it makes sense to go for leasing than owning. In real situation, it is hard to own an asset by which depreciation may add up only to a remarkable cost. In this case, it is necessary to eliminate the associated cost with depreciation, which can be incurred if the owner will decide to own the asset. The good thing about leasing in this case is the opportunity for the individual to at least get rid of the remarkable costs associated with owning that may be addressed by just leasing an asset. 3. What factors should a CFO consider when deciding whether to pursue or abandon a project? At the bottom line, the CFO tries to look at the great impact of his financial decision on the organization in general. In this case, it is always a substantial consideration to understand the probable risks of a project or a certain investment. It is important on the part of the CFO to considerably analyze and look at the potential risks in the future. After all, he is always looking forward to sustainability in the future in order to continue the business operation and ensure effective development of strategies. Investment is something that is necessary to make sense from the point of view of the CFO. Therefore, if a project has certain potential for sustainability with considerable risks involved then the CFO will most likely drink to that. 4. What are the three dividend theories? The three dividend theories are dividend irrelevance theory, bird-in-the-hand theory, and tax-preference theory. The dividend irrelevance theory puts forward the main point that without taxes or bankruptcy costs the prevailing dividend policy can be irrelevant at some point. The bird-in-the-hand theory suggests that dividend is relevant, because the retained earnings will further give the firm a brighter investment in the future. The tax-preference theory on the other hand suggests that taxes are important considerations among investors, so they prefer capital gains to dividends because the latter is considerably taxed more than the former. These are the dividend theories and clearly having corresponding assumptions to consider. The bottom line of these theories is the consideration of the investors to gain more in the process. 5. What is the signaling effect? The signaling effect may generally refer to the firm’s financing decisions. In particular, the managers compared to investors in general are the ones having close contact with the firm’s actual performance. In this case, the manager’s financing decision may eventually provide the signaling effect to investors. In this case, whatever decisions from the managers may provide certain information to the investors in order to know if the manager thinks the firm’s securities are in good shape, and so if it is good to grab the deal. In other words, the signaling effect is just like a form of professional basis of the investor prior to the actual decision-making process in the future. 6. What is the difference between a stock dividend and a stock split? Stock dividends may have closer resemblance with cash dividends, but the firm only pays out stock in the case of stock dividends. This allows the company to increase its outstanding shares, but decrease its stock price. However, in the event that the company may have noticed that its stock price is surging high, stock split occurs. Like stock dividend, stock split also allows the firm to increase its outstanding shares. However, stock split is primarily employed in order to generally increase the liquidity of the stock, allowing investors to look for lower prices and invest in them. In other words, stock split is more of a financial strategy compared to stock dividend, because of its controlling effect to the prevailing price of the stock. 7. Who are Modigliani and Miller? These are the individuals who were able to revolutionize the financial world, especially in 1958. Franco Modigliani and Merton Miller introduced the concept of capital structure. They employed studies throwing out the traditional concept that a firm must have to maintain the best debt-to-equity ratio. In their prevailing studies, they found that it is necessary that a firm must adhere to the thought that there is a necessary optimal level of debt that a company should undertake or specifically maintain. In order to prove their claims on this issue, the two financial geniuses were able to study cases by which the world may be one with taxes and without and with bankruptcy costs. 8. Why is cash management important? Cash management is important because cash is a significant scarce resource that a firm should reasonably consider important and vital to the success of business and its future growth. Without cash management, the firm may just be spending its cash to non-sense financial activities that may not guarantee future growth or sustainability in the long run. Cash management allows the firm or the management to look for noteworthy financial activities that may substantially lead to the elimination of scarcity and ensure sustainability instead. In other words, cash management is such a vital consideration of a firm that is trying to look forward to sustainability, expansion or growth in the future. Without cash management, it will be hard to ensure the growth of the firm. 9. What is ERISA? The ERISA is also known as the Employee Income Security Act of 1974. This act aims to protect the Americans’ retirement assets. This is being implemented by ensuring qualified plans that will eventually lead the plan holders to effectively handle their plan assets and not to end up misusing them instead. In order to effectively do this, ERISA requires the holders to have wider scope of knowledge on plan features and funding, the minimum standards in participations, accountability issue, rights to sue against breaches, plan protection, and other relevant ideas concerning on the requirements that are vital considerations in the actual participation. Read More