Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

Maintenance costs can make the lease analysis a complicated affair.Explain how maintenance affects financial lease calculations.

Accepted Answer

Since maintenance is harder to predict t

Question 3

A lessor finds a lease attractive from a tax viewpoint because he:

Accepted Answer

A)  need not pay taxes on his assets so long as they are leased out. 
B)  gets a tax deduction from his lease payment. 
C)  can use the lease payment to lower his taxable income. 
D)  can use the capital cost allowance tax shield from ownership. 
A)  need not pay taxes on his assets so long as they are leased out. 
B)  gets a tax deduction from his lease payment. 
C)  can use the lease payment to lower his taxable income. 
D)  can use the capital cost allowance tax shield from ownership.

Question 4

Leasing in Canada is growing less significant as interest rates fall.

Accepted Answer

A) True 
 B)False

Question 5

If a leased asset were scrapped from a continuing CCA pool after four years,and its UCC were $10,000 and its salvage is zero,what would the present value of this asset's tax shelter be if the appropriate after-tax borrowing rate is 9%,the CCA rate is 20%,and the tax rate is 40%?

Accepted Answer

A)  -$2,759 
B)  -$1,955 
C)  +$10,000 
D)  +$2,759 
A)  -$2,759 
B)  -$1,955 
C)  +$10,000 
D)  +$2,759

Question 6

Which rate should you use to discount the leasing cash flows in an NPV analysis?

Accepted Answer

A)  WACC 
B)  market interest rate 
C)  cost of debt 
D)  internal rate of return 
A)  WACC 
B)  market interest rate 
C)  cost of debt 
D)  internal rate of return

Question 7

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 8

What is the undepreciated capital cost of $800,000 asset after five CCA calculations of 30% declining balance,with the half-year rule?

Accepted Answer

A)  $0 
B)  $240,000 
C)  $163,268 
D)  $145,564 
A)  $0 
B)  $240,000 
C)  $163,268 
D)  $145,564

Question 9

Which of the following is not a normally attractive feature of an operating lease?

Accepted Answer

A)  the lessee has the option to cancel. 
B)  the lessee only needs the equipment for a short time. 
C)  the lessee can't afford to buy the asset. 
D)  the lessor offers superior and cheaper maintenance than the lessee can perform. 
A)  the lessee has the option to cancel. 
B)  the lessee only needs the equipment for a short time. 
C)  the lessee can't afford to buy the asset. 
D)  the lessor offers superior and cheaper maintenance than the lessee can perform.

Question 10

If your equivalent loan analysis of a lease shows a higher immediate cash flow for the borrowing plan,based on the same cash flows as the lease,then one should not lease.

Accepted Answer

A) True 
 B)False

Question 11

Canada Customs and Revenue Agency is suspicious of financial leases that exhibit the following non-lease characteristic:

Accepted Answer

A)  the term is very long. 
B)  there is a down payment. 
C)  lease payments change in size over the lease term. 
D)  the lease allows the asset's title to pass to the lessee without significant cost at the lease's end. 
A)  the term is very long. 
B)  there is a down payment. 
C)  lease payments change in size over the lease term. 
D)  the lease allows the asset's title to pass to the lessee without significant cost at the lease's end.

Question 12

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 13

Because salvage value is a more risky estimate than others in lease analysis,one might do one of the following:

Accepted Answer

A)  ignore salvage in one's calculations. 
B)  use a higher, risk-adjusted discount rate for salvage value estimates. 
C)  reduce the salvage value by half to account for risk. 
D)  arrange to sell the asset ahead of time. 
A)  ignore salvage in one's calculations. 
B)  use a higher, risk-adjusted discount rate for salvage value estimates. 
C)  reduce the salvage value by half to account for risk. 
D)  arrange to sell the asset ahead of time.

Question 14

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 15

All of the following must be included on a company's balance sheet except:

Accepted Answer

A)  capital leases. 
B)  sale and leaseback agreements. 
C)  operating leases. 
D)  leveraged leases. 
A)  capital leases. 
B)  sale and leaseback agreements. 
C)  operating leases. 
D)  leveraged leases.

Question 16

In an operating lease,the lessor bears more ownership risk than a lessor in a financial lease would.

Accepted Answer

A) True 
 B)False

Question 17

If a financial analysis of a lease shows a negative result of $500,a manufacturer could alter the lease terms to make leasing profitable by:

Accepted Answer

A)  cutting his price to the lessor by more than $500. 
B)  raising the CCA rate for the lessor. 
C)  raising salvage value by lowering the discount rate. 
D)  raising the lease terms. 
A)  cutting his price to the lessor by more than $500. 
B)  raising the CCA rate for the lessor. 
C)  raising salvage value by lowering the discount rate. 
D)  raising the lease terms.

Question 18

If a financial lease analysis shows a NPV of $1,750 that means:

Accepted Answer

A)  it will cost the lessee $1,750 more to lease. 
B)  it will cost the lessee $1,750 more to own. 
C)  the lessee will have to put down $1,750 as a lease deposit. 
D)  the lessor should raise his annual lease payments by $1,750. 
A)  it will cost the lessee $1,750 more to lease. 
B)  it will cost the lessee $1,750 more to own. 
C)  the lessee will have to put down $1,750 as a lease deposit. 
D)  the lessor should raise his annual lease payments by $1,750.

Question 19

When deciding whether or not to lease an asset,the _____________ should be compared against the ______________,and if the first is lower then the company should proceed with the lease.

Accepted Answer

A)  internal rate of return; cost of debt 
B)  WACC; cost of debt 
C)  cost of debt; internal rate of return 
D)  return on equity; WACC 
A)  internal rate of return; cost of debt 
B)  WACC; cost of debt 
C)  cost of debt; internal rate of return 
D)  return on equity; WACC

Question 20

Debt-rating agencies take financial and operating leases into account because:

Accepted Answer

A)  they realize that lessees need that information for their records. 
B)  the agencies are required by law to do so. 
C)  the book income of the lessee is improved by including lease obligations. 
D)  the book income will be lower, all things equal, if lease obligations show as a balance sheet item. 
A)  they realize that lessees need that information for their records. 
B)  the agencies are required by law to do so. 
C)  the book income of the lessee is improved by including lease obligations. 
D)  the book income will be lower, all things equal, if lease obligations show as a balance sheet item.

Exam 17: Leasing

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

Maintenance costs can make the lease analysis a complicated affair.Explain how maintenance affects financial lease calculations.

A lessor finds a lease attractive from a tax viewpoint because he:

Leasing in Canada is growing less significant as interest rates fall.

If a leased asset were scrapped from a continuing CCA pool after four years,and its UCC were $10,000 and its salvage is zero,what would the present value of this asset's tax shelter be if the appropriate after-tax borrowing rate is 9%,the CCA rate is 20%,and the tax rate is 40%?

Which rate should you use to discount the leasing cash flows in an NPV analysis?

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.

What is the undepreciated capital cost of $800,000 asset after five CCA calculations of 30% declining balance,with the half-year rule?

Which of the following is not a normally attractive feature of an operating lease?

If your equivalent loan analysis of a lease shows a higher immediate cash flow for the borrowing plan,based on the same cash flows as the lease,then one should not lease.

Canada Customs and Revenue Agency is suspicious of financial leases that exhibit the following non-lease characteristic:

In financial lease analysis,there is a comparison between:

Because salvage value is a more risky estimate than others in lease analysis,one might do one of the following:

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:

All of the following must be included on a company's balance sheet except:

In an operating lease,the lessor bears more ownership risk than a lessor in a financial lease would.

If a financial analysis of a lease shows a negative result of $500,a manufacturer could alter the lease terms to make leasing profitable by:

If a financial lease analysis shows a NPV of $1,750 that means:

When deciding whether or not to lease an asset,the _____________ should be compared against the ______________,and if the first is lower then the company should proceed with the lease.

Debt-rating agencies take financial and operating leases into account because:

Goals and Governance of the Firm

Financial Markets and Institutions

Accounting and Finance

Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

Valuing Stocks

Net Present Value and Other Investment Criteria

Using Discounted Cash Flow Analysis to Make Investment Decisions

Project Analysis

Introduction to Risk, Return, and the Opportunity Cost of Capital

Risk, Return, and Capital Budgeting

The Weighted-Average Cost of Capital and Company Valuation

Introduction to Corporate Financing and Governance

Venture Capital, IPOs, and Seasoned Offerings

Debt and Payout Policy

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Cash and Inventory Management

Credit Management and Collection

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

Filters

When deciding whether or not to lease an asset,the _ should be compared against the __,and if the first is lower then the company should proceed with the lease.