Question 1

One of the main benefits of leasing is that it allows the firm to reduce leverage through off-balance-sheet financing.

Accepted Answer

A) True 
 B)False

Question 2

Use the information for the question(s) below.
St. Martin's Hospital plans to purchase or lease a $2 million dollar CT scanner. The machine falls under asset class 43 and has a capital cost allowance (CCA) rate of 30%. Assume disposal for $0 at the beginning of year 6. If leased, the annual lease payments will be $500,000 per year for five years, and it is a true tax lease. Assume the tax savings savings occur at the end of each year. St. Martin's borrowing cost is 8%, and its tax rate is 35%.
-Should St.Martin lease the scanner or borrow the funds and buy the scanner?

Accepted Answer

A)  Buy the scanner; the NPV of the decision = -$74,890.28. 
B)  Buy the scanner; the NPV of the decision = -$1,749,890.28 
C)  Lease the scanner; the NPV of the decision = $1,812,027.19 
D)  Lease the scanner; the NPV of the decision = $692,559.51 
E)  Buy the scanner, the NPV of the decision = -$104,027 
A)  Buy the scanner; the NPV of the decision = -$74,890.28. 
B)  Buy the scanner; the NPV of the decision = -$1,749,890.28 
C)  Lease the scanner; the NPV of the decision = $1,812,027.19 
D)  Lease the scanner; the NPV of the decision = $692,559.51 
E)  Buy the scanner, the NPV of the decision = -$104,027

Question 3

Because finance leases increase the apparent leverage on the firm's balance sheet,firms sometimes prefer to have a lease categorized as an operating lease to keep it off the balance sheet.

Accepted Answer

A) True 
 B)False

Question 4

In terms of cash flows,a non-tax lease is directly comparable to a traditional loan.

Accepted Answer

A) True 
 B)False

Question 5

Use the table for the question(s) below.
Danby Construction is considering leasing a new crane for the next 5 years. Danby has created the following table of cash flows to help with the decision:
  
-Danby Construction has decided to lease a new crane for the next 5 years.The purchase price of the crane is $545,000,and the working life of the crane is 10 years.The crane falls under asset class 43 and has a capital cost allowance (CCA)rate of 30%.Assume disposal for $0 at the beginning of year 6.If leased,the annual lease payments will be $80,000 per year for five years,and it is a true tax lease.Assume the tax savings occur at the end of each year.If Danby's borrowing cost is 9%,and its tax rate is 30%,what is the amount of the lease-equivalent loan for the crane?

Accepted Answer

A)  $308,968 
B)  $175,382 
C)  -$363,441 
D)  $156,032 
E)  $289,618 
A)  $308,968 
B)  $175,382 
C)  -$363,441 
D)  $156,032 
E)  $289,618

Question 6

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 a finance lease,Luther's debt-to-equity ratio will be closest to:

Accepted Answer

A)  0.66 
B)  1.5 
C)  0.80 
D)  2.0 
E)  2.5 
A)  0.66 
B)  1.5 
C)  0.80 
D)  2.0 
E)  2.5

Question 7

Canberry Energy would like to lease an oil derrick for 7 years.The purchase price of the derrick is $1.5 million,and it will have a residual value of $250,000 after 7 years.If the risk-free rate is 6% APR with monthly compounding,how much greater is the monthly cost of a $1.00 out lease compared to a fair market value lease?

Accepted Answer

A)  $2357 
B)  $2390 
C)  $2402 
D)  $2414 
E)  $2433 
A)  $2357 
B)  $2390 
C)  $2402 
D)  $2414 
E)  $2433

Question 8

Which of the following is a suspect argument for leasing?

Accepted Answer

A)  avoiding capital expenditure controls 
B)  tax differences 
C)  transferring risk 
D)  efficiency gains from specialization 
E)  reduced resale costs 
A)  avoiding capital expenditure controls 
B)  tax differences 
C)  transferring risk 
D)  efficiency gains from specialization 
E)  reduced resale costs

Question 9

For a lease in which the lessor bears the risk of the residual value,why does the lease improve incentives and lower agency costs when the lessor is the manufacturer of the asset?

Accepted Answer

Such a lease provides the manufacturer w

Question 10

Use the table for the question(s) below.
  
-Consider the above balance sheet for your firm (in thousands of dollars).You plan on acquiring some new equipment using a $700,000 finance lease.If you go through with the lease,what will be the change in your firm's debt-equity ratio?

Accepted Answer

A)  0.44 
B)  0.56 
C)  0 
D)  0.80 
E)  1.69 
A)  0.44 
B)  0.56 
C)  0 
D)  0.80 
E)  1.69

Question 11

Use the information for the question(s) below.
St. Martin's Hospital plans to purchase or lease a $2 million dollar CT scanner. The machine falls under asset class 43 and has a capital cost allowance (CCA) rate of 30%. Assume disposal for $0 at the beginning of year 6. If leased, the annual lease payments will be $500,000 per year for five years, and it is a true tax lease. Assume the tax savings savings occur at the end of each year. St. Martin's borrowing cost is 8%, and its tax rate is 35%.
-What is a lease-equivalent loan?

Accepted Answer

A lease-equivalent loan is the

Question 12

A lease that is designed to obtain specific accounting and tax treatment is called a

Accepted Answer

A)  sales-type lease. 
B)  direct lease. 
C)  sale and leaseback. 
D)  leveraged lease. 
E)  synthetic lease. 
A)  sales-type lease. 
B)  direct lease. 
C)  sale and leaseback. 
D)  leveraged lease. 
E)  synthetic lease.

Question 13

Use the table for the question(s) below.
Danby Construction is considering leasing a new crane for the next 5 years. Danby has created the following table of cash flows to help with the decision:
  
-If Danby's borrowing cost is 9%,and its tax rate is 30%,what is the amount of the lease-equivalent loan for the crane?

Accepted Answer

A)  $156,032 
B)  $175,382 
C)  $308,968 
D)  -$363,441 
E)  $289,618 
A)  $156,032 
B)  $175,382 
C)  $308,968 
D)  -$363,441 
E)  $289,618

Question 14

Use the table for the question(s) below.
  
- 
Consider the above balance sheet for your firm (in thousands of dollars).You plan on acquiring some new equipment using a $400,000 finance lease.If you go through with the lease,what will be your firm's new debt-equity ratio?

Accepted Answer

A)  0.63 
B)  0.50 
C)  1.27 
D)  0 
E)  1.0 
A)  0.63 
B)  0.50 
C)  1.27 
D)  0 
E)  1.0

Question 15

Use the table for the question(s) below.
   
Your firm is a lessor that is planning to buy some new equipment and offer it to another firm through a lease arrangement. You have calculated the above cash flows for a potential lease you might offer.
-If your firm's borrowing cost is 12% and the tax rate is 45%,what is the NPV of buying and leasing?

Accepted Answer

A)  $5,422 
B)  $14,694 
C)  -$14,694 
D)  $15,069 
E)  $1,960 
A)  $5,422 
B)  $14,694 
C)  -$14,694 
D)  $15,069 
E)  $1,960

Question 16

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 the bulldozer can be leased with a $1.00-out lease.The lease payments will be closest to:

Accepted Answer

A)  $2,114 
B)  $1,825 
C)  $2,030 
D)  $2,103 
E)  $1,945 
A)  $2,114 
B)  $1,825 
C)  $2,030 
D)  $2,103 
E)  $1,945

Question 17

Use the table for the question(s) below.
   
Your firm is a lessor that is planning to buy some new equipment and offer it to another firm through a lease arrangement. You have calculated the above cash flows for a potential lease you might offer.
-If your firm's borrowing cost is 8% and the tax rate is 30%,what is the NPV of buying and leasing?

Accepted Answer

A)  $20,479 
B)  $5,422 
C)  -$2,676 
D)  -$5,422 
E)  $2,676 
A)  $20,479 
B)  $5,422 
C)  -$2,676 
D)  -$5,422 
E)  $2,676

Question 18

Which of the following is a valid argument for leasing?

Accepted Answer

A)  reduced distress costs and increased debt capacity 
B)  avoiding capital expenditure controls 
C)  preserving capital 
D)  reducing leverage through off-balance-sheet financing 
E)  increased resale costs 
A)  reduced distress costs and increased debt capacity 
B)  avoiding capital expenditure controls 
C)  preserving capital 
D)  reducing leverage through off-balance-sheet financing 
E)  increased resale costs

Question 19

To evaluate a lease correctly,the appropriate comparison is not lease versus buy,but rather,lease versus borrow.

Accepted Answer

A) True 
 B)False

Question 20

A lease where the lessee can purchase the asset at the minimum of its fair market value and a fixed price is called a

Accepted Answer

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

One of the main benefits of leasing is that it allows the firm to reduce leverage through off-balance-sheet financing.

Because finance leases increase the apparent leverage on the firm's balance sheet,firms sometimes prefer to have a lease categorized as an operating lease to keep it off the balance sheet.

In terms of cash flows,a non-tax lease is directly comparable to a traditional loan.

Which of the following is a suspect argument for leasing?

For a lease in which the lessor bears the risk of the residual value,why does the lease improve incentives and lower agency costs when the lessor is the manufacturer of the asset?

Use the table for the question(s) below. -Consider the above balance sheet for your firm (in thousands of dollars).You plan on acquiring some new equipment using a $700,000 finance lease.If you go through with the lease,what will be the change in your firm's debt-equity ratio?

A lease that is designed to obtain specific accounting and tax treatment is called a

Use the table for the question(s) below. - Consider the above balance sheet for your firm (in thousands of dollars).You plan on acquiring some new equipment using a $400,000 finance lease.If you go through with the lease,what will be your firm's new debt-equity ratio?

Which of the following is a valid argument for leasing?

To evaluate a lease correctly,the appropriate comparison is not lease versus buy,but rather,lease versus borrow.

A lease where the lessee can purchase the asset at the minimum of its fair market value and a fixed price is called a

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

The Valuation Principle: the Foundation of Financial Decision Making

The Time Value of Money

Interest Rates

Bonds

Valuing Stocks

Investment Decision Rules

Fundamentals of Capital Budgeting

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

Determining the Cost of Capital

Risk and the Pricing of Options

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modelling and Pro Forma Analysis

Working Capital Management

Short Term Financial Planning

Risk Management

International Corporate Finance

Mergers and Acquisitions

Corporate Governance

Filters

Exam 23: Leasing

One of the main benefits of leasing is that it allows the firm to reduce leverage through off-balance-sheet financing.

Because finance leases increase the apparent leverage on the firm's balance sheet,firms sometimes prefer to have a lease categorized as an operating lease to keep it off the balance sheet.

In terms of cash flows,a non-tax lease is directly comparable to a traditional loan.

Which of the following is a suspect argument for leasing?

For a lease in which the lessor bears the risk of the residual value,why does the lease improve incentives and lower agency costs when the lessor is the manufacturer of the asset?

Use the table for the question(s) below. -Consider the above balance sheet for your firm (in thousands of dollars).You plan on acquiring some new equipment using a $700,000 finance lease.If you go through with the lease,what will be the change in your firm's debt-equity ratio?

A lease that is designed to obtain specific accounting and tax treatment is called a

Use the table for the question(s) below. - Consider the above balance sheet for your firm (in thousands of dollars).You plan on acquiring some new equipment using a $400,000 finance lease.If you go through with the lease,what will be your firm's new debt-equity ratio?

Which of the following is a valid argument for leasing?

To evaluate a lease correctly,the appropriate comparison is not lease versus buy,but rather,lease versus borrow.

A lease where the lessee can purchase the asset at the minimum of its fair market value and a fixed price is called a

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

The Valuation Principle: the Foundation of Financial Decision Making

The Time Value of Money

Interest Rates

Bonds

Valuing Stocks

Investment Decision Rules

Fundamentals of Capital Budgeting

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

Determining the Cost of Capital

Risk and the Pricing of Options

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modelling and Pro Forma Analysis

Working Capital Management

Short Term Financial Planning

Risk Management

International Corporate Finance

Mergers and Acquisitions

Corporate Governance

Filters