Question 1

Leasing allows small lessors to "lend" cheaply because lease contracts and collateral come in standardized forms.

Accepted Answer

A) True 
 B)False

Question 2

A leveraged lease requires a situation where:

Accepted Answer

A) lessee loaning part of the asset purchase to the lessor. 
B) lessor selling ownership of the leased asset to others. 
C) lessor borrows part of the asset's price. 
D) lessor loans the lessee funds to maintain the asset. 
A) lessee loaning part of the asset purchase to the lessor. 
B) lessor selling ownership of the leased asset to others. 
C) lessor borrows part of the asset's price. 
D) lessor loans the lessee funds to maintain the asset.

Question 3

Why calculate a lease versus buy decision from the perspective of the lessee? Why not instead find the present value cost of owning, and then find the present value cost of leasing, and compare which is cheaper?

Accepted Answer

The lease versus buy analysis is inheren

Question 4

If an asset has a positive salvage of $1,000, exactly equal to UCC, then the lease analysis for an asset alone in its pool will show the following cash flows for that phenomenon.

Accepted Answer

A) the salvage is a cost to leasing; there is no terminal loss or gain. 
B) the salvage is a cost of owning, the terminal loss is $1,000. 
C) salvage has no effect on leasing, since it belongs to the owner. 
D) the tax shelter for the terminal gain will be $1,000. 
A) the salvage is a cost to leasing; there is no terminal loss or gain. 
B) the salvage is a cost of owning, the terminal loss is $1,000. 
C) salvage has no effect on leasing, since it belongs to the owner. 
D) the tax shelter for the terminal gain will be $1,000.

Question 5

In a financial lease, the lessee can always cancel his lease without penalty.

Accepted Answer

A) True 
 B)False

Question 6

If the lease payment for the machine in Question above were made in advance, starting at the beginning of the first year of the contract, what would the size of such a payment now be as an equivalent annual cost?

Accepted Answer

A) $71,455 
B) $14,644 
C) $15,533 
D) $15,816 
A) $71,455 
B) $14,644 
C) $15,533 
D) $15,816

Question 7

Which one of the following conditions is not a single requirement for verifying a financial lease according to Canadian accounting standards?

Accepted Answer

A) there is reasonable assurance of asset title transfer at the end of the lease. 
B) the lessee will receive all or most of the asset's economic benefits. 
C) the lessor is guaranteed a profit on the lease equal to that of other investments. 
D) the lessor recovers the fair market value of the asset at the time of signing the lease, plus a return on that investment. 
A) there is reasonable assurance of asset title transfer at the end of the lease. 
B) the lessee will receive all or most of the asset's economic benefits. 
C) the lessor is guaranteed a profit on the lease equal to that of other investments. 
D) the lessor recovers the fair market value of the asset at the time of signing the lease, plus a return on that investment.

Question 8

Describe three major differences between operating and financial leases, pointing out how these differences reflect varying lessor and lessee situations.

Accepted Answer

Operating leases are shorter term, do no

Question 9

Lease financing analysis concentrates not only on the net difference between leasing and borrowing and then buying, but also examines the various alternative assets that would be considered for leasing or buying.

Accepted Answer

A) True 
 B)False

Question 10

What is the net advantage of leasing for a competitive lease?

Accepted Answer

A) Zero 
B) $1,000 
C) $100,000 
D) It can be any number 
A) Zero 
B) $1,000 
C) $100,000 
D) It can be any number

Question 11

If a lessor paid $800,000 for an asset, how would the lessee treat this amount in his financial lease analysis?

Accepted Answer

A) lessor would ignore it, since it is a lessor cost. 
B) lessor would treat it as a cash inflow, since he avoids it by leasing. 
C) lessor would amortize it over the lease life as an expense. 
D) lessor would discount it by his cost of capital. 
A) lessor would ignore it, since it is a lessor cost. 
B) lessor would treat it as a cash inflow, since he avoids it by leasing. 
C) lessor would amortize it over the lease life as an expense. 
D) lessor would discount it by his cost of capital.

Question 12

If the present value of financial lease payments were $100,000, this capitalized amount would appear:

Accepted Answer

A) as a liability on the lessee's balance sheet. 
B) as income on the lessor's income statement. 
C) as a liability and as an asset on the lessee's balance sheet. 
D) only on the lessor's financial records. 
A) as a liability on the lessee's balance sheet. 
B) as income on the lessor's income statement. 
C) as a liability and as an asset on the lessee's balance sheet. 
D) only on the lessor's financial records.

Question 13

Salvage deserves special consideration in financial lease analysis, just as it does in any capital budgeting situation.Explain how this is true, both in terms of salvage estimates, and in the treatment of salvage and UCC tax shields.

Accepted Answer

If salvage is not zero, the present valu

Question 14

Calculate the lease payment if the net cost of buying is $40,000 and the net tax rate is 40% and the PVA is 5.486.

Accepted Answer

A) $12,152.14 
B) $14,600.17 
C) $10,167.83 
D) $11,788.89 
A) $12,152.14 
B) $14,600.17 
C) $10,167.83 
D) $11,788.89

Question 15

If a lessee has a zero tax rate, he faces no advantage of leasing over buying, since he gets no tax shelter in either case.

Accepted Answer

A) True 
 B)False

Question 16

If an equivalent loan has the same cash flows as a lease, and results in a $1,500 higher present value, one could conclude that: present value than the lease analysis indicated, this shows:

Accepted Answer

A) that leasing is preferable to buying the asset, since owning costs $1,500 more. 
B) that either is acceptable, since the cash flows are the same. 
C) one should not lease. 
D) that owning will require more capital up front. 
A) that leasing is preferable to buying the asset, since owning costs $1,500 more. 
B) that either is acceptable, since the cash flows are the same. 
C) one should not lease. 
D) that owning will require more capital up front.

Question 17

In financial lease analysis, there is a comparison between:

Accepted Answer

A) leasing costs, and owning costs and tax shield benefits foregone. 
B) the differing lives of a leased and owned asset. 
C) various salvage scenarios. 
D) economic benefits of owning or leasing one asset or another. 
A) leasing costs, and owning costs and tax shield benefits foregone. 
B) the differing lives of a leased and owned asset. 
C) various salvage scenarios. 
D) economic benefits of owning or leasing one asset or another.

Question 18

Lease payments have no tax shelter effects; only CCA's associated with owning.

Accepted Answer

A) True 
 B)False

Question 19

In a direct lease arrangement:

Accepted Answer

A) the lessee selects the equipment and has the lessor buy it for lease. 
B) the lessor buys the equipment, then looks for a lessee. 
C) the lessee buys the asset, then arranges to sell it to lease it back. 
D) the lessee owns the asset through a holding company. 
A) the lessee selects the equipment and has the lessor buy it for lease. 
B) the lessor buys the equipment, then looks for a lessee. 
C) the lessee buys the asset, then arranges to sell it to lease it back. 
D) the lessee owns the asset through a holding company.

Question 20

As a practical matter, the lessee uses a single discount rate for lease analysis, but a more refined approach would do which of the following?

Accepted Answer

A) use a different discount rate for every line on the lease analysis' cash flows, and so reflect differing risk for each cash item. 
B) use a zero discount rate for the lease payment, a high rate only for the CCA tax benefits, and a middle rate for the other cash flows. 
C) use one discount rate for the lease tax shelter, and another for the other cash flows. 
D) use a low, middle, and high discount rate and pick the average result. 
A) use a different discount rate for every line on the lease analysis' cash flows, and so reflect differing risk for each cash item. 
B) use a zero discount rate for the lease payment, a high rate only for the CCA tax benefits, and a middle rate for the other cash flows. 
C) use one discount rate for the lease tax shelter, and another for the other cash flows. 
D) use a low, middle, and high discount rate and pick the average result.

Exam 17: Leasing

Leasing allows small lessors to "lend" cheaply because lease contracts and collateral come in standardized forms.

A leveraged lease requires a situation where:

Why calculate a lease versus buy decision from the perspective of the lessee? Why not instead find the present value cost of owning, and then find the present value cost of leasing, and compare which is cheaper?

If an asset has a positive salvage of $1,000, exactly equal to UCC, then the lease analysis for an asset alone in its pool will show the following cash flows for that phenomenon.

In a financial lease, the lessee can always cancel his lease without penalty.

If the lease payment for the machine in Question above were made in advance, starting at the beginning of the first year of the contract, what would the size of such a payment now be as an equivalent annual cost?

Which one of the following conditions is not a single requirement for verifying a financial lease according to Canadian accounting standards?

Describe three major differences between operating and financial leases, pointing out how these differences reflect varying lessor and lessee situations.

Lease financing analysis concentrates not only on the net difference between leasing and borrowing and then buying, but also examines the various alternative assets that would be considered for leasing or buying.

What is the net advantage of leasing for a competitive lease?

If a lessor paid $800,000 for an asset, how would the lessee treat this amount in his financial lease analysis?

If the present value of financial lease payments were $100,000, this capitalized amount would appear:

Salvage deserves special consideration in financial lease analysis, just as it does in any capital budgeting situation.Explain how this is true, both in terms of salvage estimates, and in the treatment of salvage and UCC tax shields.

Calculate the lease payment if the net cost of buying is $40,000 and the net tax rate is 40% and the PVA is 5.486.

If a lessee has a zero tax rate, he faces no advantage of leasing over buying, since he gets no tax shelter in either case.

If an equivalent loan has the same cash flows as a lease, and results in a $1,500 higher present value, one could conclude that: present value than the lease analysis indicated, this shows:

In financial lease analysis, there is a comparison between:

Lease payments have no tax shelter effects; only CCA's associated with owning.

In a direct lease arrangement:

As a practical matter, the lessee uses a single discount rate for lease analysis, but a more refined approach would do which of the following?

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