Question 1

If annual lease payments for a firm are $26,000, calculate the annual tax shield of these payments, given that the marginal tax rate is 21 percent.

Accepted Answer

A) $5,460 
B) $16,900 
C) $40,000 
D) $0 
A) $5,460 
B) $16,900 
C) $40,000 
D) $0

Question 2

Briefly describe a sale and lease-back arrangement.

Accepted Answer

As an example, a firm in need of cash ma

Question 3

A firm is considering leasing. The firm can borrow at 9 percent, and the marginal corporate tax rate is 21 percent. What is the discount rate for valuing the lease?

Accepted Answer

A) 9 percent 
B) 30 percent 
C) 2.7 percent 
D) 7.11 percent 
A) 9 percent 
B) 30 percent 
C) 2.7 percent 
D) 7.11 percent

Question 4

Firm X sold its office building and used the proceeds to improve its financial position. The firm then leased the building back in order to continue to use the facility. This is an example of a(n)

Accepted Answer

A) operating lease. 
B) sale and lease-back. 
C) leveraged lease. 
D) fully amortized lease. 
A) operating lease. 
B) sale and lease-back. 
C) leveraged lease. 
D) fully amortized lease.

Question 5

If the depreciation is $20,000 and the marginal tax rate is 21 percent, calculate the annual depreciation tax shield.

Accepted Answer

A) $20,000 
B) $13,000 
C) $4,200 
D) $3,500 
A) $20,000 
B) $13,000 
C) $4,200 
D) $3,500

Question 6

Briefly explain how the lessor's position changes as the lessee undergoes financial distress.

Accepted Answer

If a lessee enters default and if the ba

Question 7

If lease expenses are not tax deductible, it is likely that leases will still have significant benefits to a firm.

Accepted Answer

A) True 
 B)False

Question 8

Your firm is considering leasing a new photocopier. The lease lasts for nine years. The lease calls for 10 payments of $1,000 per year with the first payment occurring immediately. The copier would cost $8,100 to buy and would be depreciated using the straight-line method to zero salvage over nine years. The firm can borrow at a rate of 8 percent. The corporate tax rate is 21 percent. What is the NPV of the lease?

Accepted Answer

A) −$1,039 
B) $6,610 
C) $743 
D) $360 
A) −$1,039 
B) $6,610 
C) $743 
D) $360

Question 9

In a lease arrangement, the owner of the asset is the

Accepted Answer

A) lessor. 
B) lessee. 
C) borrower. 
D) lender. 
A) lessor. 
B) lessee. 
C) borrower. 
D) lender.

Question 10

Suppose that a lease increases after-tax cash flows by $200,000 in each of years 1 through 10 compared with taking out an equivalent loan to purchase the asset. All else equal, and given a usable life of 10 years with no salvage value, what is the advantage of the lease, given a discount rate of 7 percent (round to the nearest $100,000)?

Accepted Answer

A) $200,000 
B) $1,400,000 
C) $1,800,000 
D) $2,000,000 
A) $200,000 
B) $1,400,000 
C) $1,800,000 
D) $2,000,000

Question 11

The decision rule for a lease versus buy decision is "buy if the equivalent annual cost of ownership and operation is greater than the best rate you can get from an outsider (lessor)."

Accepted Answer

A) True 
 B)False

Question 12

In a lease arrangement, the user of the asset is the

Accepted Answer

A) borrower. 
B) lessee. 
C) lessor. 
D) lender. 
A) borrower. 
B) lessee. 
C) lessor. 
D) lender.

Question 13

If the interest rate on debt is rD, what discount rate should the company use when valuing financial leases? The marginal tax rate is Tc.

Accepted Answer

A) rD(1 − Tc) 
B) rDTc 
C) rD 
D) 1 − rDTc 
A) rD(1 − Tc) 
B) rDTc 
C) rD 
D) 1 − rDTc

Question 14

The following are advantages to lessors over secured lenders if a lessee is under bankruptcy except:

Accepted Answer

A) the bankruptcy court decides that the leased asset is essential to the lessee's business and affirms the lease, thus paving the way for continued lease payments. 
B) the lease is rejected and the lessor can recover the leased asset. 
C) a lessee in financial distress may be able to renegotiate the lease, thus forcing the lessor to accept lower lease payments. 
D) All of the options are advantages to the lessor. 
A) the bankruptcy court decides that the leased asset is essential to the lessee's business and affirms the lease, thus paving the way for continued lease payments. 
B) the lease is rejected and the lessor can recover the leased asset. 
C) a lessee in financial distress may be able to renegotiate the lease, thus forcing the lessor to accept lower lease payments. 
D) All of the options are advantages to the lessor.

Question 15

What happens to the NPV of leasing if the lease payments increase?

Accepted Answer

The NPV of leasing will decrea

Question 16

The user of the leased asset is called the lessee, and the owner of the asset is called the lessor.

Accepted Answer

A) True 
 B)False

Question 17

If the lessor borrows most of the purchase price of a leased asset, the lease is called a

Accepted Answer

A) leveraged lease. 
B) sale and lease-back. 
C) financial lease. 
D) nonrecourse lease. 
A) leveraged lease. 
B) sale and lease-back. 
C) financial lease. 
D) nonrecourse lease.

Question 18

The following are sensible reasons for leasing:
I.Short-term leases are convenient.
II.Standardization leads to low administrative and transaction costs for the lessor.
III.Lease cancellation options are valuable.
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 19

Which of the following is not a financial lease?

Accepted Answer

A) A direct lease 
B) An operating lease 
C) A sale-and-leaseback 
D) All of the options are financial leases. 
A) A direct lease 
B) An operating lease 
C) A sale-and-leaseback 
D) All of the options are financial leases.

Question 20

Briefly explain the term cross-border leases.

Accepted Answer

Generally, lessors are searching for lea

Exam 25: Leasing

If annual lease payments for a firm are $26,000, calculate the annual tax shield of these payments, given that the marginal tax rate is 21 percent.

Briefly describe a sale and lease-back arrangement.

A firm is considering leasing. The firm can borrow at 9 percent, and the marginal corporate tax rate is 21 percent. What is the discount rate for valuing the lease?

Firm X sold its office building and used the proceeds to improve its financial position. The firm then leased the building back in order to continue to use the facility. This is an example of a(n)

If the depreciation is $20,000 and the marginal tax rate is 21 percent, calculate the annual depreciation tax shield.

Briefly explain how the lessor's position changes as the lessee undergoes financial distress.

If lease expenses are not tax deductible, it is likely that leases will still have significant benefits to a firm.

In a lease arrangement, the owner of the asset is the

The decision rule for a lease versus buy decision is "buy if the equivalent annual cost of ownership and operation is greater than the best rate you can get from an outsider (lessor)."

In a lease arrangement, the user of the asset is the

If the interest rate on debt is rD, what discount rate should the company use when valuing financial leases? The marginal tax rate is Tc.

The following are advantages to lessors over secured lenders if a lessee is under bankruptcy except:

What happens to the NPV of leasing if the lease payments increase?

The user of the leased asset is called the lessee, and the owner of the asset is called the lessor.

If the lessor borrows most of the purchase price of a leased asset, the lease is called a

The following are sensible reasons for leasing: I.Short-term leases are convenient. II.Standardization leads to low administrative and transaction costs for the lessor. III.Lease cancellation options are valuable. IV.Tax shields can be used.

Which of the following is not a financial lease?

Briefly explain the term cross-border leases.

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

Filters

If the interest rate on debt is r_D, what discount rate should the company use when valuing financial leases? The marginal tax rate is T_c.