Question 1

Which of the following is probably not a good reason for leasing instead of buying?

Accepted Answer

A) Leasing may provide off-balance sheet financing. 
B) Leasing may reduce administrative and transaction costs. 
C) There is no limit on the company's ability to deduct lease payments when calculating tax liability. 
D) All of these options are good reasons for leasing. 
A) Leasing may provide off-balance sheet financing. 
B) Leasing may reduce administrative and transaction costs. 
C) There is no limit on the company's ability to deduct lease payments when calculating tax liability. 
D) All of these options are good reasons for leasing. A

Question 2

Leasing is more likely to be advantageous when the lessor's tax rate is substantially higher than the lessee's.

Accepted Answer

A) True 
 B)False  True

Question 3

If the after-tax lease payment per year is $17,000, calculate the before-tax lease payments if the marginal tax rate is 21 percent.

Accepted Answer

A) $48,571 
B) $22,950 
C) $21,519 
D) $11,050 
A) $48,571 
B) $22,950 
C) $21,519 
D) $11,050 C

Question 4

The FASB defines financial lease as leases that meet the following:
I.The lease agreement transfers ownership to the lessee before the lease expires.
II.The lessee can purchase the asset for a bargain price when the lease expires.
III.The lease lasts for at least 75% of the asset's estimated economic life.
IV.The present value of the lease payments is at least 90% of the asset's value

Accepted Answer

A) I or II 
B) I or II or III 
C) I or II or III or IV 
D) II or III or IV 
A) I or II 
B) I or II or III 
C) I or II or III or IV 
D) II or III or IV

Question 5

The cost of a seven-year lease is $150,000 per year and matches the exact cost of a loan to finance the purchase of equipment. All else equal, and given a usable life of seven years with no salvage value, what is the advantage of a lease given a discount rate of 7 percent and no taxes?

Accepted Answer

A) $0 
B) $800,000 
C) $1,500,000 
D) $2,000,000 
A) $0 
B) $800,000 
C) $1,500,000 
D) $2,000,000

Question 6

Assume the initial financing provided by a lease is $500,000 and the present value of the cash outflow attributable to the lease is $525,000. Then the net value of the lease is

Accepted Answer

A) $25,000. 
B) −$25,000. 
C) $1,025,000. 
D) $500,000. 
A) $25,000. 
B) −$25,000. 
C) $1,025,000. 
D) $500,000.

Question 7

Discuss the differences between an operating lease and a financial lease.

Accepted Answer

Generally, operating leases are short-te

Question 8

A dubious reason for leasing is that leasing preserves capital.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following motivations are dubious reasons for leasing?
I.Leasing avoids capital expenditure controls.
II.Leasing preserves capital.
III.Leasing can make the firm's balance sheet and income statement look better by increasing book income or decreasing book assets or both.
IV.Tax shields can be used.

Accepted Answer

A) I and II only 
B) I, II, and III only 
C) I, II, III, and IV 
D) I, II, and IV only 
A) I and II only 
B) I, II, and III only 
C) I, II, III, and IV 
D) I, II, and IV only

Question 10

One of the sensible reasons for leasing is that short-term leases are convenient.

Accepted Answer

A) True 
 B)False

Question 11

Your firm is considering leasing a magic box. The lease lasts for three years. The lease calls for three payments of $1,350 per year with the first payment occurring at lease inception. The magic box would cost $3,600 to buy and would be straight-line depreciated to zero salvage value over three years. The firm can borrow at 6 percent, and the marginal corporate tax rate is 21 percent. What is the NPV of the lease?

Accepted Answer

A) $30.50 
B) −$30.50 
C) −$65.75 
D) −$146.51 
A) $30.50 
B) −$30.50 
C) −$65.75 
D) −$146.51

Question 12

Leveraged leases are a form of

Accepted Answer

A) operating leases. 
B) financial leases. 
C) leases that considerably reduce lessee's obligations. 
D) rent. 
A) operating leases. 
B) financial leases. 
C) leases that considerably reduce lessee's obligations. 
D) rent.

Question 13

In a leveraged lease structure, which party is entitled to the leased asset in the event of a default on lease payments?

Accepted Answer

A) The SPE (special-purpose entity) 
B) The lessee 
C) The lessor 
D) The lenders to the SPE (special-purpose entity) 
A) The SPE (special-purpose entity) 
B) The lessee 
C) The lessor 
D) The lenders to the SPE (special-purpose entity)

Question 14

Assume the initial financing provided by a lease is $100,000 and the present value of the cash outflow attributable to the lease is $90,000. Then the net value of the lease is

Accepted Answer

A) +$10,000. 
B) −$10,000. 
C) $190,000. 
D) $100,000. 
A) +$10,000. 
B) −$10,000. 
C) $190,000. 
D) $100,000.

Question 15

If a firm can borrow at 9 percent, what discount rate should the firm use to discount lease cash flows? (The marginal tax rate for the firm is 21 percent.)

Accepted Answer

A) 3.15 percent 
B) 7.11 percent 
C) 9 percent 
D) 0 percent 
A) 3.15 percent 
B) 7.11 percent 
C) 9 percent 
D) 0 percent

Question 16

What happens to the NPV of leasing if the tax rate increases?

Accepted Answer

At higher tax rates, the NPV of the leas

Question 17

Discuss the critical conditions under which leasing may be advantageous.

Accepted Answer

Leasing is advantageous to the lessee wh

Question 18

In a sale and lease-back, the firm sells an asset that it already owns and leases it back from the buyer.

Accepted Answer

A) True 
 B)False

Question 19

The following are sensible reasons for leasing except

Accepted Answer

A) short-term leases are convenient. 
B) standardization leads to low administrative and transaction costs for the lessor. 
C) leasing preserves capital. 
D) lease cancelation options are valuable. 
A) short-term leases are convenient. 
B) standardization leads to low administrative and transaction costs for the lessor. 
C) leasing preserves capital. 
D) lease cancelation options are valuable.

Question 20

If the net present value of a project is −$10,000, and the net present value of leasing for the project is +$12,000, calculate the APV (adjusted present value)of the project.

Accepted Answer

A) −$2,000 
B) $2,000 
C) $12,000 
D) −$10,000 
A) −$2,000 
B) $2,000 
C) $12,000 
D) −$10,000

Exam 25: Leasing

Which of the following is probably not a good reason for leasing instead of buying?

Leasing is more likely to be advantageous when the lessor's tax rate is substantially higher than the lessee's.

If the after-tax lease payment per year is $17,000, calculate the before-tax lease payments if the marginal tax rate is 21 percent.

The cost of a seven-year lease is $150,000 per year and matches the exact cost of a loan to finance the purchase of equipment. All else equal, and given a usable life of seven years with no salvage value, what is the advantage of a lease given a discount rate of 7 percent and no taxes?

Assume the initial financing provided by a lease is $500,000 and the present value of the cash outflow attributable to the lease is $525,000. Then the net value of the lease is

Discuss the differences between an operating lease and a financial lease.

A dubious reason for leasing is that leasing preserves capital.

One of the sensible reasons for leasing is that short-term leases are convenient.

Leveraged leases are a form of

In a leveraged lease structure, which party is entitled to the leased asset in the event of a default on lease payments?

Assume the initial financing provided by a lease is $100,000 and the present value of the cash outflow attributable to the lease is $90,000. Then the net value of the lease is

If a firm can borrow at 9 percent, what discount rate should the firm use to discount lease cash flows? (The marginal tax rate for the firm is 21 percent.)

What happens to the NPV of leasing if the tax rate increases?

Discuss the critical conditions under which leasing may be advantageous.

In a sale and lease-back, the firm sells an asset that it already owns and leases it back from the buyer.

The following are sensible reasons for leasing except

If the net present value of a project is −$10,000, and the net present value of leasing for the project is +$12,000, calculate the APV (adjusted present value)of the project.

Introduction to Corporate Finance

How to Calculate Present Values

Valuing Bonds

The Value of Common Stocks

Net Present Value and Other Investment Criteria

Making Investment Decisions With the Net Present Value Rule

Introduction to Risk and Return

Portfolio Theory and the Capital Asset Pricing Model

Risk and the Cost of Capital

Project Analysis

How to Ensure That Projects Truly Have Positive Npvs

Agency Problems and Investment

Efficient Markets and Behavioral Finance

An Overview of Corporate Financing

How Corporations Issue Securities

Payout Policy

Does Debt Policy Matter

How Much Should a Corporation Borrow

Financing and Valuation

Understanding Options

Valuing Options

Real Options

Credit Risk and the Value of Corporate Debt

The Many Different Kinds of Debt

Managing Risk

Managing International Risks

Financial Analysis

Financial Planning

Working Capital Management

Mergers

Corporate Restructuring

Governance and Corporate Control Around the World

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