You’ve just joined SeaCraft Inc., a manufacturer of fiberglass boats, as its CFO. When you took the job, you knew that the company was not in the best financial condition. Profits are adequate, but the firm is carrying substantial debt. To make matters worse, the company’s largest fiberglass molding machine is almost completely worn out and needs to be replaced. SeaCraft can’t pay for a new machine out of operating profit, and the owner, Sam Alston, doesn’t want to sell any new stock which would dilute his interest. You’ve looked into borrowing money to acquire the machine and can get a deal with practically no down payment and a favorable interest rate through some banking contacts. But Sam is concerned about taking on more debt. He would like to sell the company and retire, but he’s afraid that a heavier debt load will depress the price he might get. You agree that his concern is well founded.
Sam rushed into your office this morning with what he described as a great idea. He’d read an article that said just about anything could be leased and also knew that SeaCraft already leased a number of copying machines. On his way to see you, he stopped into the accounting department and found that neither the copying equipment nor any associated liability was on SeaCraft’s balance sheet. Storming into your office, he declared, “Leasing the molding machine is going to solve my debt problems! You’re supposed to be the financial expert, why didn’t you think of it? Why do I have to think of everything? Get on this quick! I want to see a lease deal on my desk by the end of the week.” Before you could answer, he rushed out for a meeting with the marketing department. Prepare a tactful memo to Sam explaining a little more about leasing and why it may not be as wonderful for SeaCraft as he thinks. Write the memo for a reader who is not a financial person (i.e., avoid using technical jargon like FASB, capitalize, equity, annuity, and present value). Talking about financing, balance sheets, assets, and debt is OK.