Question 1

In a perfect capital market,the cost of leasing and then purchasing the asset is equivalent to the cost of borrowing to purchase the asset.

Accepted Answer

A) True 
 B)False

Question 2

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 NPV of leasing versus borrowing?

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 3

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 an operating lease,Luther's debt-to-equity ratio will be closest to:

Accepted Answer

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

Question 4

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 the amount of the lease-equivalent loan for the CT scanner?

Accepted Answer

A)  $74,890.28 
B)  $1,749,890 
C)  $3,487,027 
D)  $2,367,560 
E)  $1,604,027 
A)  $74,890.28 
B)  $1,749,890 
C)  $3,487,027 
D)  $2,367,560 
E)  $1,604,027

Question 5

A lease that is viewed as a rental for accounting purposes is called a(n)

Accepted Answer

A)  operating lease. 
B)  finance lease. 
C)  true tax lease. 
D)  security interest. 
E)  direct lease. 
A)  operating lease. 
B)  finance lease. 
C)  true tax lease. 
D)  security interest. 
E)  direct lease.

Question 6

If a lease contract is characterized as a true lease in bankruptcy,the lessor is in a somewhat inferior position than the lender if the firm defaults.

Accepted Answer

A) True 
 B)False

Question 7

Toronto Trucking has decided to lease a long-haul trailer for the next 6 years using a $1.00 out lease.The purchase price of the trailer is $189,000. If the risk-free rate is a 4% APR with monthly compounding,what would be the monthly lease payment for a 6-year lease?

Accepted Answer

A)  $2,950.79 
B)  $2,947.10 
C)  $2,956.93 
D)  $2,941.16 
E)  $2,913.55 
A)  $2,950.79 
B)  $2,947.10 
C)  $2,956.93 
D)  $2,941.16 
E)  $2,913.55

Question 8

Manitoba Medical has decided to lease a new MRI machine for the next 15 years.The purchase price of the machine is $1.2 million and there is no residual value.If there is no risk of default and the risk-free rate is 4% APR with monthly compounding,what is the monthly lease payment for a 15-year lease in a perfect capital market?

Accepted Answer

A)  $8,876.26 
B)  $8,846.77 
C)  $8,804.49 
D)  $8,833.31 
E)  $8,800.00 
A)  $8,876.26 
B)  $8,846.77 
C)  $8,804.49 
D)  $8,833.31 
E)  $8,800.00

Question 9

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.
-The monthly lease payments for a four-year lease of the bulldozer are closest to:

Accepted Answer

A)  $1,870 
B)  $1,825 
C)  $1,750 
D)  $2,115 
E)  $1,945 
A)  $1,870 
B)  $1,825 
C)  $1,750 
D)  $2,115 
E)  $1,945

Question 10

A farmer decides to lease a new combine for the next 5 years.The purchase price of the combine is $1.2 million,and the expected residual value at the end of the lease is $430,000.If there is no risk of default and the risk-free rate is 4% APR with monthly compounding,what is the monthly lease payment for a 5-year lease in a perfect capital market?

Accepted Answer

A)  $15,562 
B)  $15,614 
C)  $15,237 
D)  $12,833 
E)  $14,874 
A)  $15,562 
B)  $15,614 
C)  $15,237 
D)  $12,833 
E)  $14,874

Question 11

Harrowfield Deliveries has decided to lease a delivery van for the next 5 years using a fixed price lease that allows them to buy the van for $18,000.The purchase price of the van is $67,000,and there is no risk that Harrowfield will default on the lease.If the risk-free rate is a 8% APR with monthly compounding,what would be the monthly lease payment for a 5-year lease in a perfect capital market?

Accepted Answer

A)  $1,106 
B)  $1,114 
C)  $1,059 
D)  $1,041 
E)  $1,052 
A)  $1,106 
B)  $1,114 
C)  $1,059 
D)  $1,041 
E)  $1,052

Question 12

A lease that gives the lessee the option to purchase the asset at its fair market value at the termination of the lease is called a

Accepted Answer

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

Question 13

Which of the following is a valid argument for leasing?

Accepted Answer

A)  avoiding capital expenditure controls 
B)  preserving capital 
C)  improved incentives 
D)  reducing leverage through off-balance-sheet financing 
E)  increased resale costs 
A)  avoiding capital expenditure controls 
B)  preserving capital 
C)  improved incentives 
D)  reducing leverage through off-balance-sheet financing 
E)  increased resale costs

Question 14

Why are loan payments typically higher than lease payments when the lease has a positive residual value?

Accepted Answer

With a loan you are financing the entire

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 3% and the tax rate is 45%,what is the NPV of buying and leasing?

Accepted Answer

A)  $20,479 
B)  $15,069 
C)  -$20,479 
D)  -$15,069 
E)  -$14,145 
A)  $20,479 
B)  $15,069 
C)  -$20,479 
D)  -$15,069 
E)  -$14,145

Question 16

Which of the following is a valid argument for leasing?

Accepted Answer

A)  avoiding capital expenditure controls 
B)  preserving capital 
C)  reducing leverage through off-balance-sheet financing 
D)  efficiency gains from specialization 
E)  increased resale costs 
A)  avoiding capital expenditure controls 
B)  preserving capital 
C)  reducing leverage through off-balance-sheet financing 
D)  efficiency gains from specialization 
E)  increased resale costs

Question 17

Which of the following discount rates should be used for the lease versus borrow decision with a true tax lease?

Accepted Answer

A)  the risk-free rate of interest 
B)  the company's cost of borrowing 
C)  the company's after-tax cost of borrowing 
D)  the company's weighted average cost of capital 
E)  the company's cost of equity 
A)  the risk-free rate of interest 
B)  the company's cost of borrowing 
C)  the company's after-tax cost of borrowing 
D)  the company's weighted average cost of capital 
E)  the company's cost of equity

Question 18

A lease that is viewed as an acquisition for accounting purposes is called a(n)

Accepted Answer

A)  operating lease. 
B)  finance lease. 
C)  true tax lease. 
D)  security interest. 
E)  direct lease. 
A)  operating lease. 
B)  finance lease. 
C)  true tax lease. 
D)  security interest. 
E)  direct lease.

Question 19

A lease where ownership of the asset transfers to the lessee at the end of the lease for a nominal cost is called a

Accepted Answer

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

Question 20

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 6% and the tax rate is 35%,what is the NPV of buying and leasing?

Accepted Answer

A)  $20,479 
B)  $4,022 
C)  -$11,620 
D)  -$4,022 
E)  $11,620 
A)  $20,479 
B)  $4,022 
C)  -$11,620 
D)  -$4,022 
E)  $11,620

In a perfect capital market,the cost of leasing and then purchasing the asset is equivalent to the cost of borrowing to purchase the asset.

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 NPV of leasing versus borrowing?

A lease that is viewed as a rental for accounting purposes is called a(n)

If a lease contract is characterized as a true lease in bankruptcy,the lessor is in a somewhat inferior position than the lender if the firm defaults.

Toronto Trucking has decided to lease a long-haul trailer for the next 6 years using a $1.00 out lease.The purchase price of the trailer is $189,000. If the risk-free rate is a 4% APR with monthly compounding,what would be the monthly lease payment for a 6-year lease?

A lease that gives the lessee the option to purchase the asset at its fair market value at the termination of the lease is called a

Which of the following is a valid argument for leasing?

Why are loan payments typically higher than lease payments when the lease has a positive residual value?

Which of the following is a valid argument for leasing?

Which of the following discount rates should be used for the lease versus borrow decision with a true tax lease?

A lease that is viewed as an acquisition for accounting purposes is called a(n)

A lease where ownership of the asset transfers to the lessee at the end of the lease for a nominal cost 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

In a perfect capital market,the cost of leasing and then purchasing the asset is equivalent to the cost of borrowing to purchase the asset.

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 NPV of leasing versus borrowing?

A lease that is viewed as a rental for accounting purposes is called a(n)

If a lease contract is characterized as a true lease in bankruptcy,the lessor is in a somewhat inferior position than the lender if the firm defaults.

Toronto Trucking has decided to lease a long-haul trailer for the next 6 years using a $1.00 out lease.The purchase price of the trailer is $189,000. If the risk-free rate is a 4% APR with monthly compounding,what would be the monthly lease payment for a 6-year lease?

A lease that gives the lessee the option to purchase the asset at its fair market value at the termination of the lease is called a

Which of the following is a valid argument for leasing?

Why are loan payments typically higher than lease payments when the lease has a positive residual value?

Which of the following is a valid argument for leasing?

Which of the following discount rates should be used for the lease versus borrow decision with a true tax lease?

A lease that is viewed as an acquisition for accounting purposes is called a(n)

A lease where ownership of the asset transfers to the lessee at the end of the lease for a nominal cost 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