Question 1

Which of the following statements regarding leases is FALSE?

Accepted Answer

A) Absent market imperfections,leases represent another form of zero-NPV financing available to a firm,and the Modigliani-Miller propositions apply: Leases neither increase nor decrease firm value,but serve only to divide the firm's cash flows and risks in different ways. 
B) In a perfect market,the cost of leasing is equivalent to the cost of purchasing and reselling the asset. 
C) Each lease agreement can be tailored to fit the precise nature of the asset and the needs of the parties at hand. 
D) Features of leases will be priced as part of the lease payment.Terms that give valuable options to the lessee lower the amount of the lease payments,whereas terms that restrict these options will raise them. 
A) Absent market imperfections,leases represent another form of zero-NPV financing available to a firm,and the Modigliani-Miller propositions apply: Leases neither increase nor decrease firm value,but serve only to divide the firm's cash flows and risks in different ways. 
B) In a perfect market,the cost of leasing is equivalent to the cost of purchasing and reselling the asset. 
C) Each lease agreement can be tailored to fit the precise nature of the asset and the needs of the parties at hand. 
D) Features of leases will be priced as part of the lease payment.Terms that give valuable options to the lessee lower the amount of the lease payments,whereas terms that restrict these options will raise them. D

Question 2

Which of the following statements is FALSE?

Accepted Answer

A) The lease-equivalent loan is the loan that is required on the purchase of the asset that leaves the purchaser with the same obligations as the lessor would have. 
B) Lease obligations themselves could trigger financial distress. 
C) When a firm enters into a lease,it is committing to lease payments that are a fixed future obligation of the firm. 
D) When a firm leases an asset,it is effectively adding leverage to its capital structure (whether or not the lease appears on the balance sheet for accounting purposes). 
A) The lease-equivalent loan is the loan that is required on the purchase of the asset that leaves the purchaser with the same obligations as the lessor would have. 
B) Lease obligations themselves could trigger financial distress. 
C) When a firm enters into a lease,it is committing to lease payments that are a fixed future obligation of the firm. 
D) When a firm leases an asset,it is effectively adding leverage to its capital structure (whether or not the lease appears on the balance sheet for accounting purposes). A

Question 3

Which of the following statements is FALSE?

Accepted Answer

A) In a leveraged lease,the lessor borrows from a bank or other lender to obtain the initial capital for the purchase,using the lease payments to pay interest and principal on the loan. 
B) In some circumstances,the lessor is not an independent company but rather a separate business partnership,called a special-purpose entity (SP
E) ,which is created by the lessor for the sole purpose of obtaining the lease. 
C) In a direct lease,the lessor is not the manufacturer,but is often an independent company that specializes in purchasing assets and leasing them to customers. 
D) SPEs are commonly used in synthetic leases,which are designed to obtain specific accounting and tax treatment. 
A) In a leveraged lease,the lessor borrows from a bank or other lender to obtain the initial capital for the purchase,using the lease payments to pay interest and principal on the loan. 
B) In some circumstances,the lessor is not an independent company but rather a separate business partnership,called a special-purpose entity (SP
E) ,which is created by the lessor for the sole purpose of obtaining the lease. 
C) In a direct lease,the lessor is not the manufacturer,but is often an independent company that specializes in purchasing assets and leasing them to customers. 
D) SPEs are commonly used in synthetic leases,which are designed to obtain specific accounting and tax treatment. B

Question 4

Which of the following statements is FALSE?

Accepted Answer

A) Lease payments are a fixed obligation of the firm. 
B) The risk of the lease payments is no greater than the risk of secured debt,so it is reasonable to discount the lease payments at the firm's secured borrowing rate. 
C) If a firm purchases a piece of equipment,the expense is a capital expenditure.Therefore,the purchase price can be depreciated over time,generating a depreciation tax shield. 
D) If the equipment is leased and the lease is a non-tax lease,there is no capital expenditure,but the lease payments are an operating expense. 
A) Lease payments are a fixed obligation of the firm. 
B) The risk of the lease payments is no greater than the risk of secured debt,so it is reasonable to discount the lease payments at the firm's secured borrowing rate. 
C) If a firm purchases a piece of equipment,the expense is a capital expenditure.Therefore,the purchase price can be depreciated over time,generating a depreciation tax shield. 
D) If the equipment is leased and the lease is a non-tax lease,there is no capital expenditure,but the lease payments are an operating expense.

Question 5

Which of the following statements is FALSE?

Accepted Answer

A) The decision to lease is often driven by real-world market imperfections related to leasing's accounting,tax,and legal treatment. 
B) When publicly traded firms disclose leasing transactions in their financial statements,they must follow the recommendations of the Financial Accounting Standards Board (FAS
B) . 
C) In its Statement of Financial Accounting Standards No.13 (FAS13),the FASB provides specific criteria that distinguish a true tax lease from a non-tax lease. 
D) The categories used to report leases on the financial statements affect the values of assets on the balance sheet,but they have no direct effect on the cash flows that result from a leasing transaction. 
A) The decision to lease is often driven by real-world market imperfections related to leasing's accounting,tax,and legal treatment. 
B) When publicly traded firms disclose leasing transactions in their financial statements,they must follow the recommendations of the Financial Accounting Standards Board (FAS
B) . 
C) In its Statement of Financial Accounting Standards No.13 (FAS13),the FASB provides specific criteria that distinguish a true tax lease from a non-tax lease. 
D) The categories used to report leases on the financial statements affect the values of assets on the balance sheet,but they have no direct effect on the cash flows that result from a leasing transaction.

Question 6

Use the following information to answer the question(s)below.
Assume that it is 2012 and Rearden Metal is considering the purchase of a new blast furnace costing a total of $5 million.This furnace will qualify for accelerated depreciation: 20% can be expensed immediately,followed by 32%,19.2%,11.52%,11.52% and 5.76% over the next five years.However,because of Rearden's substantial tax loss carryforwards,Rearden estimates its marginal tax rate to be only 10% over the next five years.Since Rearden will get very little tax benefit from the depreciation expense,they consider leasing the furnace instead.Suppose that Rearden and the lessor face the same 8% borrowing rate,but the lessor has a 40% marginal tax rate.Assume that the furnace is worthless after five years,the lease term is five years,and a lease would qualify as a true tax lease.
-Assuming that Rearden's annual lease payments are $1.1 million,then the effective after-tax lease borrowing rate is closest to:

Accepted Answer

A) 8.0%. 
B) 12.8%. 
C) 15.4%. 
D) 4.55%. 
A) 8.0%. 
B) 12.8%. 
C) 15.4%. 
D) 4.55%.

Question 7

A lease where ownership of the asset transfers to the lessee at the end of the lease for a nominal cost is called a:

Accepted Answer

A) fair market value cap lease. 
B) fixed price lease. 
C) $1.00 out lease. 
D) fair market value lease. 
A) fair market value cap lease. 
B) fixed price lease. 
C) $1.00 out lease. 
D) fair market value lease.

Question 8

Use the following information to answer the question(s)below.
Assume that it is 2012 and Rearden Metal is considering the purchase of a new blast furnace costing a total of $5 million.This furnace will qualify for accelerated depreciation: 20% can be expensed immediately,followed by 32%,19.2%,11.52%,11.52% and 5.76% over the next five years.However,because of Rearden's substantial tax loss carryforwards,Rearden estimates its marginal tax rate to be only 10% over the next five years.Since Rearden will get very little tax benefit from the depreciation expense,they consider leasing the furnace instead.Suppose that Rearden and the lessor face the same 8% borrowing rate,but the lessor has a 40% marginal tax rate.Assume that the furnace is worthless after five years,the lease term is five years,and a lease would qualify as a true tax lease.
-Assuming that Rearden's annual lease payments are $1.1 million,then Rearden Metal should:

Accepted Answer

A) lease the furnace since the amount saved in year zero from leasing is greater than the amount of the lease equivalent loan. 
B) buy the furnace since the amount saved in year zero from leasing is greater than the amount of the lease equivalent loan. 
C) lease the furnace since the amount saved in year zero from leasing is less than the amount of the lease equivalent loan. 
D) buy the furnace since the amount saved in year zero from leasing is less than the amount of the lease equivalent loan. 
A) lease the furnace since the amount saved in year zero from leasing is greater than the amount of the lease equivalent loan. 
B) buy the furnace since the amount saved in year zero from leasing is greater than the amount of the lease equivalent loan. 
C) lease the furnace since the amount saved in year zero from leasing is less than the amount of the lease equivalent loan. 
D) buy the furnace since the amount saved in year zero from leasing is less than the amount of the lease equivalent loan.

Question 9

Is St.Martin's better off leasing the CT scanner or financing the purchase of the CT scanner with a lease-equivalent loan and by how much is St Martin's better off?

Accepted Answer

First we construct the FCF from leasing

Question 10

Use the table for the question(s)below.
Luther Industries currently has the following balance sheet (in thousands of dollars):   Luther is about to add a new fleet of delivery trucks.The price of the fleet is $1.5 million.
-If Luther acquires the new fleet of delivery trucks using an operating lease,Luther's Debt to Equity ratio will be closest to:

Accepted Answer

A) 2.0. 
B) 1.5. 
C) 0.80. 
D) 0.66. 
A) 2.0. 
B) 1.5. 
C) 0.80. 
D) 0.66.

Question 11

Use the table for the question(s)below.
Luther Industries currently has the following balance sheet (in thousands of dollars):   Luther is about to add a new fleet of delivery trucks.The price of the fleet is $1.5 million.
-What will Luther's balance sheet look like if they acquire the new fleet of delivery trucks using a capital lease?

Accepted Answer

If the firm acquires the fleet through a

Question 12

A lease that gives the lessee the option to purchase the asset at its fair market value at the termination of the lease is called a:

Accepted Answer

A) fair market value cap lease. 
B) fair market value lease. 
C) $1.00 out lease. 
D) fixed price lease. 
A) fair market value cap lease. 
B) fair market value lease. 
C) $1.00 out lease. 
D) fixed price lease.

Question 13

Which of the following statements is FALSE?

Accepted Answer

A) If a firm only needs to use the asset for a short time,it is probably less costly to lease it than to buy and resell the asset. 
B) While owners of assets are likely to resell them only if the assets are "lemons," a short-term lease can commit the user of an asset to return it regardless of its quality.In this way,leases can help mitigate the adverse selection problem in the used goods market. 
C) Car dealerships are in a better position to sell a used car at the end of a lease than a consumer is. 
D) If the asset's tax depreciation deductions are faster than its lease payments,there are tax gains from a true tax lease if the lessor is in a lower tax bracket than the lessee. 
A) If a firm only needs to use the asset for a short time,it is probably less costly to lease it than to buy and resell the asset. 
B) While owners of assets are likely to resell them only if the assets are "lemons," a short-term lease can commit the user of an asset to return it regardless of its quality.In this way,leases can help mitigate the adverse selection problem in the used goods market. 
C) Car dealerships are in a better position to sell a used car at the end of a lease than a consumer is. 
D) If the asset's tax depreciation deductions are faster than its lease payments,there are tax gains from a true tax lease if the lessor is in a lower tax bracket than the lessee.

Question 14

Which of the following statements regarding leases and taxes is FALSE?

Accepted Answer

A) In a non-tax lease,the lessee can deduct the interest portion of the lease payments as an interest expense. 
B) In a true tax lease,the lease payments are treated as revenue for the lessor. 
C) In a true tax lease,the lessee receives the depreciation deductions associated with the ownership of the asset. 
D) The IRS separates leases into two broad categories: true tax leases and non-tax leases. 
A) In a non-tax lease,the lessee can deduct the interest portion of the lease payments as an interest expense. 
B) In a true tax lease,the lease payments are treated as revenue for the lessor. 
C) In a true tax lease,the lessee receives the depreciation deductions associated with the ownership of the asset. 
D) The IRS separates leases into two broad categories: true tax leases and non-tax leases.

Question 15

Use the information for the question(s)below.
Suppose the purchase price of a bulldozer is $90,000,its residual value in four years is certain to be $15,000,and there is no risk that the lessee will default on the lease.Assume that capital markets are perfect and the risk-free interest rate is 6% APR with monthly compounding.
-Suppose that instead of leasing the bulldozer,the company is considering purchasing a bulldozer outright by borrowing the purchase price using a four-year annuity loan.The monthly loan payments for a four-year loan to purchase the bulldozer are closest to:

Accepted Answer

A) $2115. 
B) $1825. 
C) $1870. 
D) $1750. 
A) $2115. 
B) $1825. 
C) $1870. 
D) $1750.

Question 16

Use the table for the question(s)below.
Luther Industries currently has the following balance sheet (in thousands of dollars):   Luther is about to add a new fleet of delivery trucks.The price of the fleet is $1.5 million.
-What will Luther's balance sheet look like if they acquire the new fleet of delivery trucks using an operating lease?

Accepted Answer

If the firm acquires the fleet through a

Question 17

Which of the following statements regarding leases is FALSE?

Accepted Answer

A) Leases may include early cancellation options that allow the lessee to end the lease early (perhaps for a fee). 
B) The cost of the lease will depend on the asset's residual value,which is its book value at the end of the lease. 
C) Leases may allow the lessee to trade in and upgrade the equipment to a newer model at certain points in the lease. 
D) Leases may contain buyout options that allow the lessee to purchase the asset before the end of the lease term. 
A) Leases may include early cancellation options that allow the lessee to end the lease early (perhaps for a fee). 
B) The cost of the lease will depend on the asset's residual value,which is its book value at the end of the lease. 
C) Leases may allow the lessee to trade in and upgrade the equipment to a newer model at certain points in the lease. 
D) Leases may contain buyout options that allow the lessee to purchase the asset before the end of the lease term.

Question 18

Which of the following statements is FALSE?

Accepted Answer

A) Leasing allows the party best able to bear the risk to hold it.For example,small firms with a low tolerance for risk may prefer to lease rather than purchase assets. 
B) When the lessor is the manufacturer,a lease in which the lessor bears the risk of the residual value can improve incentives and lower agency costs. 
C) For leases in which the lessor retains a substantial interest in the asset's residual value,the lessee has more of an incentive to take proper care of an asset that is leased rather than purchased. 
D) Whether they appear on the balance sheet or not,lease commitments are a liability for the firm. 
A) Leasing allows the party best able to bear the risk to hold it.For example,small firms with a low tolerance for risk may prefer to lease rather than purchase assets. 
B) When the lessor is the manufacturer,a lease in which the lessor bears the risk of the residual value can improve incentives and lower agency costs. 
C) For leases in which the lessor retains a substantial interest in the asset's residual value,the lessee has more of an incentive to take proper care of an asset that is leased rather than purchased. 
D) Whether they appear on the balance sheet or not,lease commitments are a liability for the firm.

Question 19

Which of the following statements is FALSE?

Accepted Answer

A) Most financial analysts and sophisticated investors consider operating leases (which must be listed in the footnotes of the financial statements)to be additional sources of leverage. 
B) By carefully avoiding the four criteria that define an operating lease for accounting purposes,a firm can avoid listing the long-term lease as a liability. 
C) Because a lease is equivalent to a loan,the firm can increase its actual leverage without increasing the debt-to-equity ratio on its balance sheet. 
D) For most large corporations,the amount of leverage the firm can obtain through a lease is unlikely to exceed the amount of leverage the firm can obtain through a loan. 
A) Most financial analysts and sophisticated investors consider operating leases (which must be listed in the footnotes of the financial statements)to be additional sources of leverage. 
B) By carefully avoiding the four criteria that define an operating lease for accounting purposes,a firm can avoid listing the long-term lease as a liability. 
C) Because a lease is equivalent to a loan,the firm can increase its actual leverage without increasing the debt-to-equity ratio on its balance sheet. 
D) For most large corporations,the amount of leverage the firm can obtain through a lease is unlikely to exceed the amount of leverage the firm can obtain through a loan.

Question 20

A lease where the lessee has the option to purchase the asset at the end of the lease for a price that is set upfront in the lease contract is called a:

Accepted Answer

A) fixed price lease. 
B) $1.00 out lease. 
C) fair market value lease. 
D) fair market value cap lease. 
A) fixed price lease. 
B) $1.00 out lease. 
C) fair market value lease. 
D) fair market value cap lease.

Exam 25: Leasing

Which of the following statements regarding leases is FALSE?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

A lease where ownership of the asset transfers to the lessee at the end of the lease for a nominal cost is called a:

Is St.Martin's better off leasing the CT scanner or financing the purchase of the CT scanner with a lease-equivalent loan and by how much is St Martin's better off?

A lease that gives the lessee the option to purchase the asset at its fair market value at the termination of the lease is called a:

Which of the following statements is FALSE?

Which of the following statements regarding leases and taxes is FALSE?

Which of the following statements regarding leases is FALSE?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

A lease where the lessee has the option to purchase the asset at the end of the lease for a price that is set upfront in the lease contract is called a:

The Corporation

Introduction to Financial Statement Analysis

Financial Decision Making and the Law of One Price

The Time Value of Money

Interest Rates

Valuing Bonds

Investment Decision Rules

Fundamentals of Capital Budgeting

Valuing Stocks

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behavior and Capital Market Efficiency

Capital Structure in a Perfect Market

Debt and Taxes

Financial Distress,managerial Incentives,and Information

Payout Policy

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modeling: a Case Study

Financial Options

Option Valuation

Real Options

Raising Equity Capital

Debt Financing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

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