Question 1

If a lease analysis shows exactly the same present value as an equivalent loan, the lessee should:

Accepted Answer

A) choose to lease or buy based on other criteria. 
B) lease, since there are more tax shelters. 
C) buy, because the salvage might be bigger than estimated. 
D) neither lease nor buy, since the asset choice is clearly wrong. 
A) choose to lease or buy based on other criteria. 
B) lease, since there are more tax shelters. 
C) buy, because the salvage might be bigger than estimated. 
D) neither lease nor buy, since the asset choice is clearly wrong. A

Question 2

Ajax Company is considering a three year financial lease.A cash flow schedule was developed that reflects the cost of the machine, CCA tax shields and after tax lease payments.The company has a 10% rate requirement and a 30% tax rate.
 $$\begin{array} { | l | c | c | c | c | } 
\hline \text { Year } & 0 & 1 & 2 & 3 \
\hline \text { Lease Cash Flows } & + 62,000 & - 26,800 & - 22,200 & - 17,600 \
\hline
\end{array}$$ What is the value of the lease?

Accepted Answer

The value of the equivalent loan is the present value of the after-tax lease cash outflows, discounted at the after-tax cost of borrowing, (1 -.3) ×.10 = .07, 7%: $$\text { Equivalent loan } = \frac { 26,800 } { 1.07 } + \frac { 22.200 } { 1.07 ^ { 2 } } + \frac { 17.600 } { 1.07 ^ { 3 } } = \$ 58,803.91$$ Value of the lease = NPV of lease = Initial lease cash inflow - equivalent loan
= 62,000 - 58,803.91 = $3,196.09.The lease will add positively to the value of the purchase.

Question 3

Lease analysis reveals that salvage value of an owned asset has a significant effect on the incremental analysis of a lease.

Accepted Answer

A) True 
 B)False  True

Question 4

Which of the following are specific tests that the Canada Revenue Agency will apply to determine if a particular lease meets the definition of a capital lease? The lease term is equal to 75% or more of the economic life of the leased property.
The present value of the minimum lease payments is equal to 70% or more of the fair value of the leased property at the inception of the lease.
Provisions are made such that ownership of the leased property is transferred to the lessee at the end of the lease term.

Accepted Answer

A) 1 only 
B) 1 and 2 
C) 1 and 3 
D) 2 and 3 
A) 1 only 
B) 1 and 2 
C) 1 and 3 
D) 2 and 3

Question 5

Which one of the following is not a cash flow item in financial lease analysis?

Accepted Answer

A) the lessor's repayment schedule for financing the asset. 
B) the value of the salvage to the lessor. 
C) the CCA tax shelters of the lessor. 
D) the lease payment's tax shelter impacts for the lessee. 
A) the lessor's repayment schedule for financing the asset. 
B) the value of the salvage to the lessor. 
C) the CCA tax shelters of the lessor. 
D) the lease payment's tax shelter impacts for the lessee.

Question 6

Lease capitalization's value determination requires one of the following methods.

Accepted Answer

A) finding the net present value of future lease payments. 
B) recording the asset's purchase price as the lessee's asset. 
C) the lessor shows the asset's effect on his leverage. 
D) altering the lessee's restrictive covenants by the amount of the asset's value. 
A) finding the net present value of future lease payments. 
B) recording the asset's purchase price as the lessee's asset. 
C) the lessor shows the asset's effect on his leverage. 
D) altering the lessee's restrictive covenants by the amount of the asset's value.

Question 7

Which of the following statements is not true of a financial lease?

Accepted Answer

A) it can be cancelled after the equipment is no longer needed. 
B) it is a source of financing. 
C) it is binding obligation for the lessee. 
D) it extends over most of the economic life of the leased asset. 
A) it can be cancelled after the equipment is no longer needed. 
B) it is a source of financing. 
C) it is binding obligation for the lessee. 
D) it extends over most of the economic life of the leased asset.

Question 8

Even with lease capitalization, the financial positions of lessors and lessees differ.Which of the following statements does not support that assertion?

Accepted Answer

A) the asset choice is influenced by the method of financing. 
B) secured creditors are more exposed to risk in the lease than are lessees. 
C) in the face of default, the lessor's exposure to loss is larger than the lessee's. 
D) the lessor stands to profit from unexpectedly high salvage proceeds, while the lessee does not. 
A) the asset choice is influenced by the method of financing. 
B) secured creditors are more exposed to risk in the lease than are lessees. 
C) in the face of default, the lessor's exposure to loss is larger than the lessee's. 
D) the lessor stands to profit from unexpectedly high salvage proceeds, while the lessee does not.

Question 9

Maintenance costs can make the lease analysis a complicated affair.Explain how maintenance affects financial lease calculations.

Accepted Answer

Since maintenance is harder to predict t

Question 10

In an operating lease, the lessor bears more ownership risk than a lessor in a financial lease would.

Accepted Answer

A) True 
 B)False

Question 11

If a financial lease analysis uses a higher discount rate than a lessee would ordinarily use on conventional secured loan, which one of the following reasons would best explain that dichotomy?

Accepted Answer

A) the lessor charges a higher interest rate on the lease than normally. 
B) the asset is unreliable, so requires a higher discount rate. 
C) the lessee may be unsure that he can earn enough taxable income to use the tax shields in the lease analysis. 
D) the discount rate is uncertain, so a higher one is used. 
A) the lessor charges a higher interest rate on the lease than normally. 
B) the asset is unreliable, so requires a higher discount rate. 
C) the lessee may be unsure that he can earn enough taxable income to use the tax shields in the lease analysis. 
D) the discount rate is uncertain, so a higher one is used.

Question 12

A financial lease is also called a full-payout lease because:

Accepted Answer

A) lessee agrees to pay the full amount of the lease up front. 
B) lessor agrees to pay out the lease if the lessee defaults. 
C) lessee pays for full cost of the asset in present value terms. 
D) payout of the lease is guaranteed by insurance. 
A) lessee agrees to pay the full amount of the lease up front. 
B) lessor agrees to pay out the lease if the lessee defaults. 
C) lessee pays for full cost of the asset in present value terms. 
D) payout of the lease is guaranteed by insurance.

Question 13

Four annual payments of $20,000 are required at the end of each year.Donny's required rate of return is 11% and has a 40% tax rate.The asset is in the 30% CCA class.The half year rule applies and CCA is taken in year 0.After the fourth year, the asset becomes worthless.Determine the NPV of the lease.
 $$\begin{array}{l}
\begin{array} { | l | r | } 
\hline \text { DATA: }\
\hline \text { Equipment value } & 70,000 \
\hline \text { Lease payments } & 20,000 \
\hline \text { Number of lease payments } & 4 \
\hline \text { Tax rate } & 40 \% \
\hline \text { CCA rate } & 30 \% \
\hline \text { Rate of interest } & 11.00 \% \
\hline \text { After tax rate of interest } & 6.60 \% \
\hline
\end{array}
\end{array}$$

Accepted Answer

The answer of Four annual payments of $20,000 are required...

Question 14

Which rate should you use to discount the leasing cash flows in an NPV analysis?

Accepted Answer

A) WACC 
B) market interest rate 
C) cost of debt 
D) internal rate of return 
A) WACC 
B) market interest rate 
C) cost of debt 
D) internal rate of return

Question 15

Ajax is considering leasing a $900,000 equipment.Five annual payments of $190,000 are due in advance.Ajax's required rate of return is 12% and has a 35% tax rate.The asset is in the 25% CCA class.The half year rule applies and CCA is taken in year 0.After the fifth year, the asset becomes worthless.Determine the NPV of the lease.
 $$\begin{array}{l}
\begin{array} { | l | r | } 
\hline \text { DATA: }\
\hline \text { Equipment value } & 900,000 \
\hline \text { Lease payments } & 190,000 \
\hline \text { Number of lease payments } & 5 \
\hline \text { Tax rate } & 35 \% \
\hline \text { CCA rate } & 25 \% \
\hline \text { Rate of interest } & 12.00 \% \
\hline \text { After tax rate of interest } & 7.80 \% \
\hline
\end{array}
\end{array}$$

Accepted Answer

The answer of Ajax is considering leasing a $900,000 equipment.Five...

Question 16

If one capitalizes a lease, off-balance-sheet financing is not possible.

Accepted Answer

A) True 
 B)False

Question 17

Governments "incur losses" on good leases in the sense that:

Accepted Answer

A) well-constructed leases defer taxes. 
B) the best leases take maximum advantage of lessor-lessee tax differentials. 
C) the government finds itself helping finance leases that fail because of lessor insolvency. 
D) The CCA rates are lower for some assets more than others. 
A) well-constructed leases defer taxes. 
B) the best leases take maximum advantage of lessor-lessee tax differentials. 
C) the government finds itself helping finance leases that fail because of lessor insolvency. 
D) The CCA rates are lower for some assets more than others.

Question 18

Provide a critique of two weak or dubious reasons for leasing.

Accepted Answer

Leasing to avoid capital expenditure con

Question 19

In the event of lessee bankruptcy, the lessor's legal position with the leased asset is this:

Accepted Answer

A) the lessor will be first in line as a creditor to recoup the lease's balance. 
B) the lessor can take back the leased asset, but with no salvage guarantees. 
C) the lessor has no recourse at all. 
D) the lessee will ordinarily pay out the remainder of his lease obligations. 
A) the lessor will be first in line as a creditor to recoup the lease's balance. 
B) the lessor can take back the leased asset, but with no salvage guarantees. 
C) the lessor has no recourse at all. 
D) the lessee will ordinarily pay out the remainder of his lease obligations.

Question 20

Lessors specializing in financial leases often have off-lease assets for sale, since this helps their business marketing.

Accepted Answer

A) True 
 B)False

Exam 17: Leasing

If a lease analysis shows exactly the same present value as an equivalent loan, the lessee should:

Lease analysis reveals that salvage value of an owned asset has a significant effect on the incremental analysis of a lease.

Which one of the following is not a cash flow item in financial lease analysis?

Lease capitalization's value determination requires one of the following methods.

Which of the following statements is not true of a financial lease?

Even with lease capitalization, the financial positions of lessors and lessees differ.Which of the following statements does not support that assertion?

Maintenance costs can make the lease analysis a complicated affair.Explain how maintenance affects financial lease calculations.

In an operating lease, the lessor bears more ownership risk than a lessor in a financial lease would.

If a financial lease analysis uses a higher discount rate than a lessee would ordinarily use on conventional secured loan, which one of the following reasons would best explain that dichotomy?

A financial lease is also called a full-payout lease because:

Which rate should you use to discount the leasing cash flows in an NPV analysis?

If one capitalizes a lease, off-balance-sheet financing is not possible.

Governments "incur losses" on good leases in the sense that:

Provide a critique of two weak or dubious reasons for leasing.

In the event of lessee bankruptcy, the lessor's legal position with the leased asset is this:

Lessors specializing in financial leases often have off-lease assets for sale, since this helps their business marketing.

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