Question 1

In a perfect capital market,leases neither increase nor decrease firm value,but serve only to divide the firm's cash flows and risks in different ways.

Accepted Answer

A) True 
 B)False

Question 2

Justine decides to enter into a 6-year car lease agreement.The purchase price of the car is $24,995,and the expected residual value after 5 years is $9,500.If there is no risk of default and the risk-free rate is 7% APR with monthly compounding,what is the monthly lease payment for a 6-year lease in a perfect capital market?

Accepted Answer

A)  $215.21 
B)  $423.67 
C)  $317.74 
D)  $319.59 
E)  $347.51 
A)  $215.21 
B)  $423.67 
C)  $317.74 
D)  $319.59 
E)  $347.51

Question 3

A lease in which the lessor is not the manufacturer of the asset but is often an independent company that specializes in purchasing assets and leasing them to customers 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 4

Toronto Trucking has decided to lease a long-haul trailer for the next 5 years using a fixed price lease that allows them to buy the asset for $95,000.The purchase price of the trailer is $235,000,and the trailer has a residual value of $110,000 after 5 years. If the risk-free rate is a 3% APR with monthly compounding,what would be the monthly lease payment for a 5-year lease?

Accepted Answer

A)  $2,746.25 
B)  $2,753.12 
C)  $2,747.39 
D)  $2,740.64 
E)  $2,712.89 
A)  $2,746.25 
B)  $2,753.12 
C)  $2,747.39 
D)  $2,740.64 
E)  $2,712.89

Question 5

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 $950,000 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)  0.20 
C)  0 
D)  0.58 
E)  0.38 
A)  0.44 
B)  0.20 
C)  0 
D)  0.58 
E)  0.38

Question 6

Use the table for the question(s) below.
   
Your firm is contemplating leasing some new equipment. The cash flows of either buying or leasing the equipment are shown in the table above.
-If your firm's borrowing cost is 10% and the tax rate is 40%,what is the amount of the lease-equivalent loan for the new equipment?

Accepted Answer

A)  $178,937 
B)  $158,169 
C)  $41,831 
D)  $27,014 
E)  $172,986 
A)  $178,937 
B)  $158,169 
C)  $41,831 
D)  $27,014 
E)  $172,986

Question 7

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 25%,what is the NPV of buying and leasing?

Accepted Answer

A)  $20,479 
B)  $5,844 
C)  -$14,694 
D)  -$5,844 
E)  $14,694 
A)  $20,479 
B)  $5,844 
C)  -$14,694 
D)  -$5,844 
E)  $14,694

Question 8

In a perfect capital market,the PV of lease payments will be equal to the purchase price of the asset plus the PV of the residual value of the asset.

Accepted Answer

A) True 
 B)False

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.
-Suppose that instead of leasing the bulldozer,the company is considering purchasing a bulldozer outright by borrowing the purchase price using a four-year annuity loan.The monthly loan payments for a four-year loan to purchase the Bulldozer are closest to:

Accepted Answer

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

Question 10

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 NPV of leasing versus borrowing?

Accepted Answer

A)  $308,968 
B)  $175,382 
C)  $289,618 
D)  $156,032 
E)  -$98,405 
A)  $308,968 
B)  $175,382 
C)  $289,618 
D)  $156,032 
E)  -$98,405

Question 11

A lease in which the lessor is the manufacturer (or a primary dealer)of the asset 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 12

Most leases involve a large upfront payment.

Accepted Answer

A) True 
 B)False

Question 13

What will Luther's balance sheet look like if they acquire the new fleet of delivery trucks using an operating lease?

Accepted Answer

If the firm acquires the fleet through a

Question 14

Which of the following is a suspect argument for leasing?

Accepted Answer

A)  reduced resale costs 
B)  tax differences 
C)  transferring risk 
D)  reducing leverage through off-balance-sheet financing 
E)  efficiency gains from specialization 
A)  reduced resale costs 
B)  tax differences 
C)  transferring risk 
D)  reducing leverage through off-balance-sheet financing 
E)  efficiency gains from specialization

Question 15

A lease in which the lessor borrows from a bank or other lender to obtain the initial capital for the purchase of an asset and using the lease payments to pay the interest and principal on the loan 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 16

When evaluating a true tax lease,we discount the incremental cash flows using the pre-tax borrowing rate.

Accepted Answer

A) True 
 B)False

Question 17

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 7%,and its tax rate is 35%,what is the NPV of leasing versus borrowing?

Accepted Answer

A)  $96,747 
B)  $369,671 
C)  $348,253 
D)  -$363,441 
E)  $75,329 
A)  $96,747 
B)  $369,671 
C)  $348,253 
D)  -$363,441 
E)  $75,329

Question 18

Suppose your firm is planning on obtaining $500,000 of new equipment using a four-year fair market value lease,and the equipment has a remaining useful life of 7 years.If the monthly lease payments are $11,500 and the appropriate discount rate is 7% APR with monthly compounding,will the lease be classified as an operating lease or a finance lease for the lessee?

Accepted Answer

A)  Finance lease, because the title to the property transfers to the lessee at the end of the lease term. 
B)  Finance lease, because the present value of the minimum lease payments at the start of the lease is substantially all of the asset's fair value. 
C)  Operating lease, because the present value of the minimum lease payments at the start of the lease is less than substantially all of the asset's fair value. 
D)  Operating lease, because the lease term is for the major part of the estimated economic life of the asset. 
E)  Finance lease, because the lease term is for the major part of the estimated economic life of the asset. 
A)  Finance lease, because the title to the property transfers to the lessee at the end of the lease term. 
B)  Finance lease, because the present value of the minimum lease payments at the start of the lease is substantially all of the asset's fair value. 
C)  Operating lease, because the present value of the minimum lease payments at the start of the lease is less than substantially all of the asset's fair value. 
D)  Operating lease, because the lease term is for the major part of the estimated economic life of the asset. 
E)  Finance lease, because the lease term is for the major part of the estimated economic life of the asset.

Question 19

Use the table for the question(s) below.
   
Your firm is contemplating leasing some new equipment. The cash flows of either buying or leasing the equipment are shown in the table above.
-If your firm's borrowing cost is 7% and the tax rate is 35%,what is the NPV of leasing versus borrowing?

Accepted Answer

A)  $178,937 
B)  $169,070 
C)  $30,930 
D)  $21,063 
E)  -$14,145 
A)  $178,937 
B)  $169,070 
C)  $30,930 
D)  $21,063 
E)  -$14,145

Question 20

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%.
-Why do we compare leasing to borrowing rather than leasing to buying when evaluating a true tax lease?

Accepted Answer

When a firm leases an asset,it is effect

In a perfect capital market,leases neither increase nor decrease firm value,but serve only to divide the firm's cash flows and risks in different ways.

A lease in which the lessor is not the manufacturer of the asset but is often an independent company that specializes in purchasing assets and leasing them to customers 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 $950,000 finance lease.If you go through with the lease,what will be the change in your firm's debt-equity ratio?

In a perfect capital market,the PV of lease payments will be equal to the purchase price of the asset plus the PV of the residual value of the asset.

A lease in which the lessor is the manufacturer (or a primary dealer)of the asset is called a

Most leases involve a large upfront payment.

What will Luther's balance sheet look like if they acquire the new fleet of delivery trucks using an operating lease?

Which of the following is a suspect argument for leasing?

A lease in which the lessor borrows from a bank or other lender to obtain the initial capital for the purchase of an asset and using the lease payments to pay the interest and principal on the loan is called a

When evaluating a true tax lease,we discount the incremental cash flows using the pre-tax borrowing rate.

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 7%,and its tax rate is 35%,what is the NPV of leasing versus borrowing?

Use the table for the question(s) below. Your firm is contemplating leasing some new equipment. The cash flows of either buying or leasing the equipment are shown in the table above. -If your firm's borrowing cost is 7% and the tax rate is 35%,what is the NPV of leasing versus borrowing?

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,leases neither increase nor decrease firm value,but serve only to divide the firm's cash flows and risks in different ways.

A lease in which the lessor is not the manufacturer of the asset but is often an independent company that specializes in purchasing assets and leasing them to customers 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 $950,000 finance lease.If you go through with the lease,what will be the change in your firm's debt-equity ratio?

In a perfect capital market,the PV of lease payments will be equal to the purchase price of the asset plus the PV of the residual value of the asset.

A lease in which the lessor is the manufacturer (or a primary dealer)of the asset is called a

Most leases involve a large upfront payment.

What will Luther's balance sheet look like if they acquire the new fleet of delivery trucks using an operating lease?

Which of the following is a suspect argument for leasing?

A lease in which the lessor borrows from a bank or other lender to obtain the initial capital for the purchase of an asset and using the lease payments to pay the interest and principal on the loan is called a

When evaluating a true tax lease,we discount the incremental cash flows using the pre-tax borrowing rate.

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 7%,and its tax rate is 35%,what is the NPV of leasing versus borrowing?

Use the table for the question(s) below. Your firm is contemplating leasing some new equipment. The cash flows of either buying or leasing the equipment are shown in the table above. -If your firm's borrowing cost is 7% and the tax rate is 35%,what is the NPV of leasing versus borrowing?

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