Question 1

All but one of the following are reasons for leasing:

Accepted Answer

A) companies with a weak credit rating can obtain financing because the lessor retains title to the asset. 
B) payments on a lease are variable, and therefore removes an additional element of uncertainty. 
C) the terms offered under a lease may be more attractive than those that a customer could get under a comparable loan. 
D) leases provide the lessee with flexibility and insurance against obsolescence. 
A) companies with a weak credit rating can obtain financing because the lessor retains title to the asset. 
B) payments on a lease are variable, and therefore removes an additional element of uncertainty. 
C) the terms offered under a lease may be more attractive than those that a customer could get under a comparable loan. 
D) leases provide the lessee with flexibility and insurance against obsolescence.

Question 2

An equivalent loan analysis of a lease payment finds the loan amount that is equal to the present value of the after-tax lease payments, discounted with the firm's after-tax cost of capital.

Accepted Answer

A) True 
 B)False

Question 3

Sale and lease-back leases involve:

Accepted Answer

A) real estate transactions only, where lessee and lessor swap land. 
B) situations where the user sells his property and leases it back. 
C) transactions where the land is sold to the lessee at the end of the lease. 
D) land ownership transfers part way through a lease agreement. 
A) real estate transactions only, where lessee and lessor swap land. 
B) situations where the user sells his property and leases it back. 
C) transactions where the land is sold to the lessee at the end of the lease. 
D) land ownership transfers part way through a lease agreement.

Question 4

If a financial lease analysis shows a NPV of $1,750 that means:

Accepted Answer

A) it will cost the lessee $1,750 more to lease. 
B) it will cost the lessee $1,750 more to own. 
C) the lessee will have to put down $1,750 as a lease deposit. 
D) the lessor should raise his annual lease payments by $1,750. 
A) it will cost the lessee $1,750 more to lease. 
B) it will cost the lessee $1,750 more to own. 
C) the lessee will have to put down $1,750 as a lease deposit. 
D) the lessor should raise his annual lease payments by $1,750.

Question 5

If your equivalent loan analysis of a lease shows a higher immediate cash flow for the borrowing plan, based on the same cash flows as the lease, then one should not lease.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following is not a normally attractive feature of an operating lease?

Accepted Answer

A) the lessee has the option to cancel. 
B) the lessee only needs the equipment for a short time. 
C) the lessee can't afford to buy the asset. 
D) the lessor offers superior and cheaper maintenance than the lessee can perform. 
A) the lessee has the option to cancel. 
B) the lessee only needs the equipment for a short time. 
C) the lessee can't afford to buy the asset. 
D) the lessor offers superior and cheaper maintenance than the lessee can perform.

Question 7

Since salvage is more risky than other lease analysis cash flows, it is logical, though not always practical, to use a higher discount rate for salvage in present value calculations in such analysis.

Accepted Answer

A) True 
 B)False

Question 8

If the lease payments of the $800,000 asset were $210,000, first payment occurring at the beginning of the first year when the lease is signed, how would the lessee treat these payments in his financial lease analysis? His tax rate is 40%.

Accepted Answer

A) lessee would treat each $210,000 payment as a cash outflow. 
B) lessee would deduct these $210,000 payments from his CCA. 
C) lessee would record net cash outflows for five years of $126,000 for leasing. 
D) lessee would amortize the $800,000 over five years and show these inflows. 
A) lessee would treat each $210,000 payment as a cash outflow. 
B) lessee would deduct these $210,000 payments from his CCA. 
C) lessee would record net cash outflows for five years of $126,000 for leasing. 
D) lessee would amortize the $800,000 over five years and show these inflows.

Question 9

Global Inc.is considering leasing a $45,000 equipment.Four annual payments of $15,000 at the end of each year.Global Inc.'s required rate of return is 13% and has a 30% tax rate.The asset is in the 25% CCA class.The half year rule applies and CCA is taken in year 0.After the fourth year, the asset becomes worthless.Determine the CCA tax shields for this lease.
 $$\begin{array}{l}
\begin{array} { | l | r | } 
\hline \text { DATA: }\
\hline \text { Equipment value } & 45,000 \
\hline \text { Lease payments } & 15,000 \
\hline \text { Number of lease payments } & 4 \
\hline \text { Tax rate } & 30 \% \
\hline \text { CCA rate } & 25 \% \
\hline \text { Rate of interest } & 13.00 \% \
\hline \text { After tax rate of interest } & 9.10 \% \
\hline
\end{array}
\end{array}$$

Accepted Answer

The answer of Global Inc.is considering leasing a $45,000 equipment.Four...

Question 10

If the lease payments of the $800,000 asset were $210,000, first payment occurring at the beginning of the first year when the lease is signed, and tax rate is 40%.What would the CCA tax shields be for Years 0 and 4, assuming these tax shields start in Year 0 and end in Year 4? Remember: CCA = 30%.

Accepted Answer

A) $48,000 and $27,989 
B) $52,000 and $0 
C) $120,000 and $69,972 
D) $48,000 and $69,972 
A) $48,000 and $27,989 
B) $52,000 and $0 
C) $120,000 and $69,972 
D) $48,000 and $69,972

Question 11

What is the undepreciated capital cost of $800,000 asset after five CCA calculations of 30% declining balance, with the half-year rule?

Accepted Answer

A) $0 
B) $240,000 
C) $163,268 
D) $145,564 
A) $0 
B) $240,000 
C) $163,268 
D) $145,564

Question 12

A lessor finds a lease attractive from a tax viewpoint because he:

Accepted Answer

A) need not pay taxes on his assets so long as they are leased out. 
B) gets a tax deduction from his lease payment. 
C) can use the lease payment to lower his taxable income. 
D) can use the capital cost allowance tax shield from ownership. 
A) need not pay taxes on his assets so long as they are leased out. 
B) gets a tax deduction from his lease payment. 
C) can use the lease payment to lower his taxable income. 
D) can use the capital cost allowance tax shield from ownership.

Question 13

Which one of the following characteristics does not distinguish financial leases from operating leases?

Accepted Answer

A) financial lease analysis compares leasing to borrowing. 
B) financial leases are not cancelable. 
C) operating leases involve real physical assets. 
D) operating leases do not extend over the economic life of the asset. 
A) financial lease analysis compares leasing to borrowing. 
B) financial leases are not cancelable. 
C) operating leases involve real physical assets. 
D) operating leases do not extend over the economic life of the asset.

Question 14

Debt-rating agencies take financial and operating leases into account because:

Accepted Answer

A) they realize that lessees need that information for their records. 
B) the agencies are required by law to do so. 
C) the book income of the lessee is improved by including lease obligations. 
D) the book income will be lower, all things equal, if lease obligations show as a balance sheet item. 
A) they realize that lessees need that information for their records. 
B) the agencies are required by law to do so. 
C) the book income of the lessee is improved by including lease obligations. 
D) the book income will be lower, all things equal, if lease obligations show as a balance sheet item.

Question 15

An equivalent loan helps one think about the results associated with financial lease analysis where the viewpoint is from a lessee's perspective, net of the lessor's position.Explain how this is true, and the equivalent loan concept's usefulness in lease analysis.

Accepted Answer

An equivalent loan comes from a calculat

Question 16

If in financial lease analysis an asset's undepreciated capital cost were $200,000 and its salvage or scrap value were zero, how would the lessor treat this situation if it were assumed the asset would be alone in its class if it were owned? The tax rate is 40%.

Accepted Answer

A) lessor would ignore this, since this is the lessor's business. 
B) lessor would record this as an $80,000 lost tax shield at the end of the lease life. 
C) lessor would record the $200,000 as a cost of leasing at the end of the lease. 
D) lessor would record the $200,000 as a cost the beginning of the lease. 
A) lessor would ignore this, since this is the lessor's business. 
B) lessor would record this as an $80,000 lost tax shield at the end of the lease life. 
C) lessor would record the $200,000 as a cost of leasing at the end of the lease. 
D) lessor would record the $200,000 as a cost the beginning of the lease.

Question 17

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

Accepted Answer

A) the lessor is obligated to a secured creditor for the full original value of the loan associated with the leased asset. 
B) the lessor owes only the amount associated with the remainder of the asset's lease. 
C) the lessee can force the lessor to provide another asset. 
D) the lessor has no obligations to creditors, since his asset is leased. 
A) the lessor is obligated to a secured creditor for the full original value of the loan associated with the leased asset. 
B) the lessor owes only the amount associated with the remainder of the asset's lease. 
C) the lessee can force the lessor to provide another asset. 
D) the lessor has no obligations to creditors, since his asset is leased.

Question 18

The before-tax cost of risk-free debt is the appropriate discount rate for net present value analysis of lease costs.

Accepted Answer

A) True 
 B)False

Question 19

Following the time sequence described in Table 17.1, what would the present value of cash flows be for leasing this $800,000 asset if the lessee's before tax cost of capital were 15% and the lease payments of the assets were $210,000? The tax rate is 40% and CCA = 30%.Note that the asset is scrapped and alone in its pool at the time of disposition.The asset is scrapped in 4 years.

Accepted Answer

A) ($24,555) 
B) $3,456 
C) $2,457 
D) $1,708 
A) ($24,555) 
B) $3,456 
C) $2,457 
D) $1,708

Question 20

If the tax rates of the lessor and lessee are the same, then the financial lease analysis that shows a $500 positive NPV will suggest that:

Accepted Answer

A) the lessor is $500 better off than the lessee. 
B) the user should lease, not buy. 
C) the lessor should lower his lease terms. 
D) The user should buy, not lease. 
A) the lessor is $500 better off than the lessee. 
B) the user should lease, not buy. 
C) the lessor should lower his lease terms. 
D) The user should buy, not lease.

Exam 17: Leasing

All but one of the following are reasons for leasing:

An equivalent loan analysis of a lease payment finds the loan amount that is equal to the present value of the after-tax lease payments, discounted with the firm's after-tax cost of capital.

Sale and lease-back leases involve:

If a financial lease analysis shows a NPV of $1,750 that means:

If your equivalent loan analysis of a lease shows a higher immediate cash flow for the borrowing plan, based on the same cash flows as the lease, then one should not lease.

Which of the following is not a normally attractive feature of an operating lease?

Since salvage is more risky than other lease analysis cash flows, it is logical, though not always practical, to use a higher discount rate for salvage in present value calculations in such analysis.

If the lease payments of the $800,000 asset were $210,000, first payment occurring at the beginning of the first year when the lease is signed, how would the lessee treat these payments in his financial lease analysis? His tax rate is 40%.

If the lease payments of the $800,000 asset were $210,000, first payment occurring at the beginning of the first year when the lease is signed, and tax rate is 40%.What would the CCA tax shields be for Years 0 and 4, assuming these tax shields start in Year 0 and end in Year 4? Remember: CCA = 30%.

What is the undepreciated capital cost of $800,000 asset after five CCA calculations of 30% declining balance, with the half-year rule?

A lessor finds a lease attractive from a tax viewpoint because he:

Which one of the following characteristics does not distinguish financial leases from operating leases?

Debt-rating agencies take financial and operating leases into account because:

An equivalent loan helps one think about the results associated with financial lease analysis where the viewpoint is from a lessee's perspective, net of the lessor's position.Explain how this is true, and the equivalent loan concept's usefulness in lease analysis.

If in financial lease analysis an asset's undepreciated capital cost were $200,000 and its salvage or scrap value were zero, how would the lessor treat this situation if it were assumed the asset would be alone in its class if it were owned? The tax rate is 40%.

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

The before-tax cost of risk-free debt is the appropriate discount rate for net present value analysis of lease costs.

If the tax rates of the lessor and lessee are the same, then the financial lease analysis that shows a $500 positive NPV will suggest that:

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