Question 1

Sale and lease-back leases involve:

Accepted Answer

A)  real estate transactions only, where lessee and lessor swap land. 
B)  situations where the user sells his property and leases it back. 
C)  transactions where the land is sold to the lessee at the end of the lease. 
D)  land ownership transfers part way through a lease agreement. 
A)  real estate transactions only, where lessee and lessor swap land. 
B)  situations where the user sells his property and leases it back. 
C)  transactions where the land is sold to the lessee at the end of the lease. 
D)  land ownership transfers part way through a lease agreement. B

Question 2

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  False

Question 3

If one capitalizes a lease,off-balance-sheet financing is not possible.

Accepted Answer

A) True 
 B)False  True

Question 4

All but one of the following are reasons for leasing:

Accepted Answer

A)  companies with a weak credit rating can obtain financing because the lessor retains title to the asset. 
B)  payments on a lease are variable, and therefore removes an additional element of uncertainty. 
C)  the terms offered under a lease may be more attractive than those that a customer could get under a comparable loan. 
D)  leases provide the lessee with flexibility and insurance against obsolescence. 
A)  companies with a weak credit rating can obtain financing because the lessor retains title to the asset. 
B)  payments on a lease are variable, and therefore removes an additional element of uncertainty. 
C)  the terms offered under a lease may be more attractive than those that a customer could get under a comparable loan. 
D)  leases provide the lessee with flexibility and insurance against obsolescence.

Question 5

The appropriate discount rate for financial lease analysis is:

Accepted Answer

A)  the after-tax cost of equity. 
B)  the lessee's weighted average cost of capital. 
C)  the lessor's required rate of return. 
D)  the lessee's after-tax cost of secured debt. 
A)  the after-tax cost of equity. 
B)  the lessee's weighted average cost of capital. 
C)  the lessor's required rate of return. 
D)  the lessee's after-tax cost of secured debt.

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

A lessor and lessee are most able to maximize their financial communities of interest through a lease contract if the lessor's tax rate is very high and the lessee's very low.Explain how this would be true,and the implications for the type of firms who lease their assets and the type of companies who operate as lessors.

Accepted Answer

If a lease analysis shows a positive NPV

Question 8

It is difficult to rent fragile equipment in short-term operating leases.

Accepted Answer

A) True 
 B)False

Question 9

Short-term leases are convenient but:

Accepted Answer

A)  often expensive for the lessee. 
B)  often cheap for the lessee. 
C)  usually involve second-rate equipment. 
D)  are not as profitable for the lessor as longer-term ones. 
A)  often expensive for the lessee. 
B)  often cheap for the lessee. 
C)  usually involve second-rate equipment. 
D)  are not as profitable for the lessor as longer-term ones.

Question 10

Off-balance sheet financing implies that:

Accepted Answer

A)  leases would be capitalized. 
B)  leases would not be capitalized in financial statements. 
C)  leases would be amortized in a separate account not in the lessee's balance sheet. 
D)  leases show up in the income statement, but not the balance sheet. 
A)  leases would be capitalized. 
B)  leases would not be capitalized in financial statements. 
C)  leases would be amortized in a separate account not in the lessee's balance sheet. 
D)  leases show up in the income statement, but not the balance sheet.

Question 11

An equivalent loan analysis of a lease payment finds the loan amount that is equal to the present value of the after-tax lease payments,discounted with the firm's after-tax cost of capital.

Accepted Answer

A) True 
 B)False

Question 12

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 13

Lease analysis reveals that salvage value of an owned asset has a significant effect on the incremental analysis of a lease.

Accepted Answer

A) True 
 B)False

Question 14

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 15

When one capitalizes a lease,one finds the nominal total of all future lease payments and records them as a liability on right hand side of the balance sheet.

Accepted Answer

A) True 
 B)False

Question 16

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 17

If the lease payments of the $800,000 asset were $210,000,first payment occurring at the beginning of the first year when the lease is signed,how would the lessee treat these payments in his financial lease analysis? His tax rate is 40%.

Accepted Answer

A)  lessee would treat each $210,000 payment as a cash outflow. 
B)  lessee would deduct these $210,000 payments from his CCA. 
C)  lessee would record net cash outflows for five years of $126,000 for leasing. 
D)  lessee would amortize the $800,000 over five years and show these inflows. 
A)  lessee would treat each $210,000 payment as a cash outflow. 
B)  lessee would deduct these $210,000 payments from his CCA. 
C)  lessee would record net cash outflows for five years of $126,000 for leasing. 
D)  lessee would amortize the $800,000 over five years and show these inflows.

Question 18

The before-tax cost of risk-free debt is the appropriate discount rate for net present value analysis of lease costs.

Accepted Answer

A) True 
 B)False

Question 19

The most important issue that makes it possible for both a lessor and lessee to gain from a financial lease arrangement is (aside from risk):

Accepted Answer

A)  the lessee's better cash flow. 
B)  the lessor's purchasing power for leased assets. 
C)  the lessee's higher marginal tax rate. 
D)  the lessor's higher marginal tax rate. 
A)  the lessee's better cash flow. 
B)  the lessor's purchasing power for leased assets. 
C)  the lessee's higher marginal tax rate. 
D)  the lessor's higher marginal tax rate.

Question 20

If in financial lease analysis an asset's undepreciated capital cost were $200,000 and its salvage or scrap value were zero,how would the lessor treat this situation if it were assumed the asset would be alone in its class if it were owned? The tax rate is 40%.

Accepted Answer

A)  lessor would ignore this, since this is the lessor's business. 
B)  lessor would record this as an $80,000 lost tax shield at the end of the lease life. 
C)  lessor would record the $200,000 as a cost of leasing at the end of the lease. 
D)  lessor would record the $200,000 as a cost the beginning of the lease. 
A)  lessor would ignore this, since this is the lessor's business. 
B)  lessor would record this as an $80,000 lost tax shield at the end of the lease life. 
C)  lessor would record the $200,000 as a cost of leasing at the end of the lease. 
D)  lessor would record the $200,000 as a cost the beginning of the lease.

Exam 17: Leasing

Sale and lease-back leases involve:

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.

If one capitalizes a lease,off-balance-sheet financing is not possible.

All but one of the following are reasons for leasing:

The appropriate discount rate for financial lease analysis is:

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

It is difficult to rent fragile equipment in short-term operating leases.

Short-term leases are convenient but:

Off-balance sheet financing implies that:

An equivalent loan analysis of a lease payment finds the loan amount that is equal to the present value of the after-tax lease payments,discounted with the firm's after-tax cost of capital.

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.

Lease analysis reveals that salvage value of an owned asset has a significant effect on the incremental analysis of a lease.

Equipment manufacturers lease out equipment because:

When one capitalizes a lease,one finds the nominal total of all future lease payments and records them as a liability on right hand side of the balance sheet.

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

If the lease payments of the $800,000 asset were $210,000,first payment occurring at the beginning of the first year when the lease is signed,how would the lessee treat these payments in his financial lease analysis? His tax rate is 40%.

The before-tax cost of risk-free debt is the appropriate discount rate for net present value analysis of lease costs.

The most important issue that makes it possible for both a lessor and lessee to gain from a financial lease arrangement is (aside from risk):

If in financial lease analysis an asset's undepreciated capital cost were $200,000 and its salvage or scrap value were zero,how would the lessor treat this situation if it were assumed the asset would be alone in its class if it were owned? The tax rate is 40%.

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Valuing Bonds

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Using Discounted Cash Flow Analysis to Make Investment Decisions

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Introduction to Corporate Financing and Governance

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