Lease Vs. Loan: Evidence from Bangladesh

Abstract

Finance comprises mainly three decisions, namely investment decisions, financing decisions, and dividend decisions. Every decision is significant to maximize shareholders’ value. Among these three decisions, financing decisions determine the proportion of debt and equity capital in the capital structure. The importance of financing decisions is enormous in the business world. A firm cannot reach its ultimate goal of wealth maximization if it undertakes a wrong financial decision. Thus, this paper examines the comparative cost of two sources of financing, namely lease and loan to determine the best sources at different tax rates and interest rates. It is a case-based analysis where six lease contacts are examined. Data collection is the most troublesome step in this research. The prevailing interest rate, loan amount, and conditions of the loan collected from the lessee are based on high confidentiality. After analyzing six cases the research finds that the present value of cash outflow of lease is less than that of the loan at different interest rates and tax rates in Bangladesh. The study also reveals that tax, cost of capital, duration, present value of cash flow differences, and additional payment of lease and loan significantly impact the present value of cash outflow of leases and loans. Moreover, lease financing has some other benefits compared to loans. Thus firms should give more attention to lease financing as a source of financing.