Question 1

Which one of the following is a valid statement about leasing in Canada?

Accepted Answer

A)  less than 5% of machinery and equipment in Canada is leased. 
B)  lessors prefer to keep equipment at the end of a lease in order to lease it again. 
C)  lessees typically purchase the asset at the end of the lease. 
D)  operating leases are particularly useful in the long term. 
A)  less than 5% of machinery and equipment in Canada is leased. 
B)  lessors prefer to keep equipment at the end of a lease in order to lease it again. 
C)  lessees typically purchase the asset at the end of the lease. 
D)  operating leases are particularly useful in the long term.

Question 2

If the tax rates of the lessor and lessee are the same,then the financial lease analysis that shows a $500 positive NPV will suggest that:

Accepted Answer

A)  the lessor is $500 better off than the lessee. 
B)  the user should lease, not buy. 
C)  the lessor should lower his lease terms. 
D)  The user should buy, not lease. 
A)  the lessor is $500 better off than the lessee. 
B)  the user should lease, not buy. 
C)  the lessor should lower his lease terms. 
D)  The user should buy, not lease.

Question 3

An operating lease is a longer term arrangement than a financial lease.

Accepted Answer

A) True 
 B)False

Question 4

You are the manager of a sales division.You are considering leasing a fleet of cars for your staff.You can buy the cars for $300,000 or you can lease them for eight years at $60,000 per year.The company faces a tax rate of 40% and a CCA rate of 10% on vehicles.If the company buys the cars and finances the purchase with a loan,they will pay 7% after-tax in interest.Assume that after the term of the lease is over,the salvage value of the cars will be zero.What is the NPV of the lease?

Accepted Answer

A)  $9,340 
B)  $16,754 
C)  $29,521 
D)  34,195 
A)  $9,340 
B)  $16,754 
C)  $29,521 
D)  34,195

Question 5

Lease capitalization's value determination requires one of the following methods.

Accepted Answer

A)  finding the net present value of future lease payments. 
B)  recording the asset's purchase price as the lessee's asset. 
C)  the lessor shows the asset's effect on his leverage. 
D)  altering the lessee's restrictive covenants by the amount of the asset's value. 
A)  finding the net present value of future lease payments. 
B)  recording the asset's purchase price as the lessee's asset. 
C)  the lessor shows the asset's effect on his leverage. 
D)  altering the lessee's restrictive covenants by the amount of the asset's value.

Question 6

Financial leases are a source of financing in the sense that:

Accepted Answer

A)  the lessor must find a source of financing to buy the asset. 
B)  the lessee must borrow money for his first lease payment. 
C)  the lessee avoids buying, but gets the use of the asset through financing. 
D)  the lessor can use the lease payments as collateral to borrow. 
A)  the lessor must find a source of financing to buy the asset. 
B)  the lessee must borrow money for his first lease payment. 
C)  the lessee avoids buying, but gets the use of the asset through financing. 
D)  the lessor can use the lease payments as collateral to borrow.

Question 7

Lease payments have no tax shelter effects; only CCA's associated with owning.

Accepted Answer

A) True 
 B)False

Question 8

If a lease is capitalized,it has one of the following attributes:

Accepted Answer

A)  it shows up as a liability on the lessor's financial statements. 
B)  it is debt on the right-hand side of the lessee's balance sheet, and an asset on the left. 
C)  the lease's present value shows as a liability on the lessee's balance sheet, but not an asset. 
D)  the lease becomes a capital asset for the lessor, allowing him to capitalize on its value to borrow more. 
A)  it shows up as a liability on the lessor's financial statements. 
B)  it is debt on the right-hand side of the lessee's balance sheet, and an asset on the left. 
C)  the lease's present value shows as a liability on the lessee's balance sheet, but not an asset. 
D)  the lease becomes a capital asset for the lessor, allowing him to capitalize on its value to borrow more.

Question 9

Which of the following is not a reason for leasing?

Accepted Answer

A)  leasing provides the lessor with insurance against obsolescence. 
B)  leasing can reduce taxable income. 
C)  leasing can be a source of off-balance-sheet financing, provided certain conditions are met. 
D)  a company can obtain financing easier by the leasing company retaining title to the asset. 
A)  leasing provides the lessor with insurance against obsolescence. 
B)  leasing can reduce taxable income. 
C)  leasing can be a source of off-balance-sheet financing, provided certain conditions are met. 
D)  a company can obtain financing easier by the leasing company retaining title to the asset.

Question 10

A leveraged lease requires a situation where:

Accepted Answer

A)  lessee loaning part of the asset purchase to the lessor. 
B)  lessor selling ownership of the leased asset to others. 
C)  lessor borrows part of the asset's price. 
D)  lessor loans the lessee funds to maintain the asset. 
A)  lessee loaning part of the asset purchase to the lessor. 
B)  lessor selling ownership of the leased asset to others. 
C)  lessor borrows part of the asset's price. 
D)  lessor loans the lessee funds to maintain the asset.

Question 11

In the event of a lessor's bankruptcy,the lessor's legal position with the leased asset is this.

Accepted Answer

A)  the lessor is obligated to a secured creditor for the full original value of the loan associated with the leased asset. 
B)  the lessor owes only the amount associated with the remainder of the asset's lease. 
C)  the lessee can force the lessor to provide another asset. 
D)  the lessor has no obligations to creditors, since his asset is leased. 
A)  the lessor is obligated to a secured creditor for the full original value of the loan associated with the leased asset. 
B)  the lessor owes only the amount associated with the remainder of the asset's lease. 
C)  the lessee can force the lessor to provide another asset. 
D)  the lessor has no obligations to creditors, since his asset is leased.

Question 12

Financial leasing is only justified by one of the following arguments.

Accepted Answer

A)  the lessor can make better use of CCA tax shields than can a lessee. 
B)  leasing allows financial officers to more easily hide capital expenditures. 
C)  leasing allows one to get access to an asset with no money down. 
D)  such leases need not appear on the balance sheet as capitalized items. 
A)  the lessor can make better use of CCA tax shields than can a lessee. 
B)  leasing allows financial officers to more easily hide capital expenditures. 
C)  leasing allows one to get access to an asset with no money down. 
D)  such leases need not appear on the balance sheet as capitalized items.

Question 13

Lessors specializing in financial leases often have off-lease assets for sale,since this helps their business marketing.

Accepted Answer

A) True 
 B)False

Question 14

A capitalized lease affects financial leverage and rate of return calculations.

Accepted Answer

A) True 
 B)False

Question 15

An operating lease is cancelable because:

Accepted Answer

A)  the asset is easily broken or damaged. 
B)  the lessee typically is uncertain about his use needs for the asset. 
C)  the lessor may need the asset for some other purpose. 
D)  the lessee is not a good credit risk. 
A)  the asset is easily broken or damaged. 
B)  the lessee typically is uncertain about his use needs for the asset. 
C)  the lessor may need the asset for some other purpose. 
D)  the lessee is not a good credit risk.

Question 16

If a lease is capitalized,the firm successfully circumvents restrictive financing covenants.

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,and tax rate is 40%.What would the CCA tax shields be for Years 0 and 4,assuming these tax shields start in Year 0 and end in Year 4? Remember: CCA = 30%.

Accepted Answer

A)  $48,000 and $27,989 
B)  $52,000 and $0 
C)  $120,000 and $69,972 
D)  $48,000 and $69,972 
A)  $48,000 and $27,989 
B)  $52,000 and $0 
C)  $120,000 and $69,972 
D)  $48,000 and $69,972

Question 18

If an asset had a $20,000 salvage value at the end of the lease and the asset is sold,it would make no cash flow difference whether the asset pool were terminated or remained open.

Accepted Answer

A) True 
 B)False

Question 19

Leasing allows small lessors to "lend" cheaply because lease contracts and collateral come in standardized forms.

Accepted Answer

A) True 
 B)False

Question 20

Governments "incur losses" on good leases in the sense that:

Accepted Answer

A)  well-constructed leases defer taxes. 
B)  the best leases take maximum advantage of lessor-lessee tax differentials. 
C)  the government finds itself helping finance leases that fail because of lessor insolvency. 
D)  The CCA rates are lower for some assets more than others. 
A)  well-constructed leases defer taxes. 
B)  the best leases take maximum advantage of lessor-lessee tax differentials. 
C)  the government finds itself helping finance leases that fail because of lessor insolvency. 
D)  The CCA rates are lower for some assets more than others.

Exam 17: Leasing

Which one of the following is a valid statement about leasing in Canada?

If the tax rates of the lessor and lessee are the same,then the financial lease analysis that shows a $500 positive NPV will suggest that:

An operating lease is a longer term arrangement than a financial lease.

Lease capitalization's value determination requires one of the following methods.

Financial leases are a source of financing in the sense that:

Lease payments have no tax shelter effects; only CCA's associated with owning.

If a lease is capitalized,it has one of the following attributes:

Which of the following is not a reason for leasing?

A leveraged lease requires a situation where:

In the event of a lessor's bankruptcy,the lessor's legal position with the leased asset is this.

Financial leasing is only justified by one of the following arguments.

Lessors specializing in financial leases often have off-lease assets for sale,since this helps their business marketing.

A capitalized lease affects financial leverage and rate of return calculations.

An operating lease is cancelable because:

If a lease is capitalized,the firm successfully circumvents restrictive financing covenants.

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,and tax rate is 40%.What would the CCA tax shields be for Years 0 and 4,assuming these tax shields start in Year 0 and end in Year 4? Remember: CCA = 30%.

If an asset had a $20,000 salvage value at the end of the lease and the asset is sold,it would make no cash flow difference whether the asset pool were terminated or remained open.

Leasing allows small lessors to "lend" cheaply because lease contracts and collateral come in standardized forms.

Governments "incur losses" on good leases in the sense that:

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