Question 1

Cash-flow analysis of a financial lease counts capital cost allowances from owning as savings for a lessee.

Accepted Answer

A) True 
 B)False

Question 2

An operating lease is a longer term arrangement than a financial lease.

Accepted Answer

A) True 
 B)False

Question 3

Some assets are almost impossible to lease short-term because:

Accepted Answer

A) they are too expensive. 
B) the assets are hard to transport for use. 
C) the lessees don't want pay enough. 
D) the assets to be leased are too susceptible to damage and abuse. 
A) they are too expensive. 
B) the assets are hard to transport for use. 
C) the lessees don't want pay enough. 
D) the assets to be leased are too susceptible to damage and abuse.

Question 4

Financial leases cover the entire economic life of the asset and are not cancellable.

Accepted Answer

A) True 
 B)False

Question 5

If a machine costs $50,000, and $5,000 a year for the lessor to maintain and insure, what equivalent annual cost would serve as the basis of a full-service lease payment for a six-year operating lease, paid in arrears, if the lessor's cost of capital is 8%?

Accepted Answer

A) $15,816 
B) $73,114 
C) $17,155 
D) $55,000 
A) $15,816 
B) $73,114 
C) $17,155 
D) $55,000

Question 6

If a lease is capitalized, the firm successfully circumvents restrictive financing covenants.

Accepted Answer

A) True 
 B)False

Question 7

When a lease is terminated, the equipment always reverts to the lessor.

Accepted Answer

A) True 
 B)False

Question 8

Lease analysis is affected by assumptions about the asset pool in which the leased asset is kept.Explain how the results of such analysis would be different if the asset was alone or if many assets in it pool at the end of a lease contract.Consider the situation where the tax rate is 40%, CCA = 30% and the discount rate were 10%, and the difference between UCC and salvage were $10,000.

Accepted Answer

If the asset were alone, upon dispositio

Question 9

Leasing is a financial arrangement between a lessor, or owner, and a lessee or user of an asset.

Accepted Answer

A) True 
 B)False

Question 10

Lease standardization helps justify leasing because:

Accepted Answer

A) it makes all lessors pay the same lease payments. 
B) it lowers costs through standardized leased asset and security evaluations. 
C) it makes it possible for lessors to investigate lessees more thoroughly. 
D) it helps lessees to select similar assets. 
A) it makes all lessors pay the same lease payments. 
B) it lowers costs through standardized leased asset and security evaluations. 
C) it makes it possible for lessors to investigate lessees more thoroughly. 
D) it helps lessees to select similar assets.

Question 11

Financial leasing is only justified by one of the following arguments.

Accepted Answer

A) the lessor can make better use of CCA tax shields than can a lessee. 
B) leasing allows financial officers to more easily hide capital expenditures. 
C) leasing allows one to get access to an asset with no money down. 
D) such leases need not appear on the balance sheet as capitalized items. 
A) the lessor can make better use of CCA tax shields than can a lessee. 
B) leasing allows financial officers to more easily hide capital expenditures. 
C) leasing allows one to get access to an asset with no money down. 
D) such leases need not appear on the balance sheet as capitalized items.

Question 12

Equipment manufacturers lease out equipment because:

Accepted Answer

A) they can make more money renting out than manufacturing. 
B) leases provide cheap access for small business. 
C) laws require equipment makers to lease it. 
D) leasing agreements help support and expand sales. 
A) they can make more money renting out than manufacturing. 
B) leases provide cheap access for small business. 
C) laws require equipment makers to lease it. 
D) leasing agreements help support and expand sales.

Question 13

Canada Customs and Revenue Agency is suspicious of financial leases that exhibit the following non-lease characteristic:

Accepted Answer

A) the term is very long. 
B) there is a down payment. 
C) lease payments change in size over the lease term. 
D) the lease allows the asset's title to pass to the lessee without significant cost at the lease's end. 
A) the term is very long. 
B) there is a down payment. 
C) lease payments change in size over the lease term. 
D) the lease allows the asset's title to pass to the lessee without significant cost at the lease's end.

Question 14

If a lease is capitalized, it has one of the following attributes:

Accepted Answer

A) it shows up as a liability on the lessor's financial statements. 
B) it is debt on the right-hand side of the lessee's balance sheet, and an asset on the left. 
C) the lease's present value shows as a liability on the lessee's balance sheet, but not an asset. 
D) the lease becomes a capital asset for the lessor, allowing him to capitalize on its value to borrow more. 
A) it shows up as a liability on the lessor's financial statements. 
B) it is debt on the right-hand side of the lessee's balance sheet, and an asset on the left. 
C) the lease's present value shows as a liability on the lessee's balance sheet, but not an asset. 
D) the lease becomes a capital asset for the lessor, allowing him to capitalize on its value to borrow more.

Question 15

You are the CFO of a company.You are considering leasing photocopiers from the manufacturer instead of purchasing them for $200,000.You can borrow at after-tax interest of 9% and the corporate tax rate is 35%.The lease payment will be $50,000 for five years.At the end of the five years, the photocopiers will be worthless.Photocopiers are depreciated at 20% CCA rate.What is the NPV of the lease?

Accepted Answer

A) $27,304 
B) $39,582 
C) $52,395 
D) $73,586 
A) $27,304 
B) $39,582 
C) $52,395 
D) $73,586

Question 16

Calculate the net cash flow of lease, given lease payments of $10,500; lease payment tax benefits of $4,150; and CCA tax shield of $2,200

Accepted Answer

The answer of Calculate the net cash flow of lease,...

Question 17

If a leased asset has maintenance offered as an included extra, such an extra would be evaluated differently from other leasing cash flows in this way.

Accepted Answer

A) maintenance would be estimated over shorter time intervals than the lease. 
B) maintenance would represent an extra cost to the lessee. 
C) maintenance would be discounted at a higher discount rate to reflect risk, and represent a cash inflow for lessee. 
D) maintenance would all be paid up front. 
A) maintenance would be estimated over shorter time intervals than the lease. 
B) maintenance would represent an extra cost to the lessee. 
C) maintenance would be discounted at a higher discount rate to reflect risk, and represent a cash inflow for lessee. 
D) maintenance would all be paid up front.

Question 18

Nantec 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 12% return requirement and a 40% tax rate.
 $$\begin{array} { | l | c | c | c | c | } 
\hline \text { Year } & 0 & 1 & 2 & 3 \
\hline \text { Lease Cash Flows } & + 80,000 & - 30,800 & - 30,000 & - 30,000 \
\hline
\end{array}$$ What is the value of the lease?

Accepted Answer

The value of the equivalent loan is the

Question 19

An operating lease is cancelable because:

Accepted Answer

A) the asset is easily broken or damaged. 
B) the lessee typically is uncertain about his use needs for the asset. 
C) the lessor may need the asset for some other purpose. 
D) the lessee is not a good credit risk. 
A) the asset is easily broken or damaged. 
B) the lessee typically is uncertain about his use needs for the asset. 
C) the lessor may need the asset for some other purpose. 
D) the lessee is not a good credit risk.

Question 20

If a financial lease analysis shows a positive result, which one of the following is true?

Accepted Answer

A) the user should own the asset. 
B) the lessor should own the asset. 
C) given the asset choice, the lease terms favour leasing. 
D) leasing is preferable so long as there is no salvage. 
A) the user should own the asset. 
B) the lessor should own the asset. 
C) given the asset choice, the lease terms favour leasing. 
D) leasing is preferable so long as there is no salvage.

Exam 17: Leasing

Cash-flow analysis of a financial lease counts capital cost allowances from owning as savings for a lessee.

An operating lease is a longer term arrangement than a financial lease.

Some assets are almost impossible to lease short-term because:

Financial leases cover the entire economic life of the asset and are not cancellable.

If a machine costs $50,000, and $5,000 a year for the lessor to maintain and insure, what equivalent annual cost would serve as the basis of a full-service lease payment for a six-year operating lease, paid in arrears, if the lessor's cost of capital is 8%?

If a lease is capitalized, the firm successfully circumvents restrictive financing covenants.

When a lease is terminated, the equipment always reverts to the lessor.

Leasing is a financial arrangement between a lessor, or owner, and a lessee or user of an asset.

Lease standardization helps justify leasing because:

Financial leasing is only justified by one of the following arguments.

Equipment manufacturers lease out equipment because:

Canada Customs and Revenue Agency is suspicious of financial leases that exhibit the following non-lease characteristic:

If a lease is capitalized, it has one of the following attributes:

Calculate the net cash flow of lease, given lease payments of $10,500; lease payment tax benefits of $4,150; and CCA tax shield of $2,200

If a leased asset has maintenance offered as an included extra, such an extra would be evaluated differently from other leasing cash flows in this way.

An operating lease is cancelable because:

If a financial lease analysis shows a positive result, which one of the following is true?

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