Question 1

Which one of the following conditions is not a single requirement for verifying a financial lease according to Canadian accounting standards?

Accepted Answer

A) There is reasonable assurance of asset title transfer at the end of the lease 
B) The lessee will receive all or most of the asset's economic benefits 
C) The lessor is guaranteed a profit on the lease equal to that of other investments 
D) The lessor recovers the fair market value of the asset at the time of signing the lease, plus a return on that investment 
A) There is reasonable assurance of asset title transfer at the end of the lease 
B) The lessee will receive all or most of the asset's economic benefits 
C) The lessor is guaranteed a profit on the lease equal to that of other investments 
D) The lessor recovers the fair market value of the asset at the time of signing the lease, plus a return on that investment C

Question 2

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

Accepted Answer

A) The lessor will be first in line as a creditor to recoup the lease's balance 
B) The lessor can take back the leased asset, but with no salvage guarantees 
C) The lessor has no recourse at all 
D) The lessee will ordinarily pay out the remainder of his lease obligations 
A) The lessor will be first in line as a creditor to recoup the lease's balance 
B) The lessor can take back the leased asset, but with no salvage guarantees 
C) The lessor has no recourse at all 
D) The lessee will ordinarily pay out the remainder of his lease obligations B

Question 3

If an asset has a positive salvage of $1,000, exactly equal to UCC, then the lease analysis for an asset alone in its pool will show the following cash flows for that phenomenon.

Accepted Answer

A) The salvage is a cost to leasing; there is no terminal loss or gain 
B) The salvage is a cost of owning, the terminal loss is $1,000 
C) Salvage has no effect on leasing, since it belongs to the owner 
D) The tax shelter for the terminal gain will be $1,000 
A) The salvage is a cost to leasing; there is no terminal loss or gain 
B) The salvage is a cost of owning, the terminal loss is $1,000 
C) Salvage has no effect on leasing, since it belongs to the owner 
D) The tax shelter for the terminal gain will be $1,000 A

Question 4

In a net lease:

Accepted Answer

A) The lessee pays for insurance, but does not maintain the asset 
B) The lessee pays to maintain, insure, and meet property tax obligations on the asset 
C) The lessor pays for insurance, maintenance, and property taxes 
D) The lessor and lessee split the maintenance, insurance, and property taxes 50:50 
A) The lessee pays for insurance, but does not maintain the asset 
B) The lessee pays to maintain, insure, and meet property tax obligations on the asset 
C) The lessor pays for insurance, maintenance, and property taxes 
D) The lessor and lessee split the maintenance, insurance, and property taxes 50:50

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

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 7

A sale and leaseback arrangement transfers ownership from a user to a lessor who then leases the asset back to the former owner.

Accepted Answer

A) True 
 B)False

Question 8

If the present value of financial lease payments were $100,000, this capitalized amount would appear:

Accepted Answer

A) As a liability on the lessee's balance sheet 
B) As income on the lessor's income statement 
C) As a liability and as an asset on the lessee's balance sheet 
D) Only on the lessor's financial records 
A) As a liability on the lessee's balance sheet 
B) As income on the lessor's income statement 
C) As a liability and as an asset on the lessee's balance sheet 
D) Only on the lessor's financial records

Question 9

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 10

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 11

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

Question 12

115.Calculate the net cash flow of lease, given lease payments of $10,500; lease payment tax benefits of $4,150; and CCA tax shield of $2,200

Accepted Answer

The answer of 115.Calculate the net cash flow of lease,...

Question 13

A lessor and lessee have the same exposure to financial risk.

Accepted Answer

A) True 
 B)False

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

Since salvage is more risky than other lease analysis cash flows, it is logical, though not always practical, to use a higher discount rate for salvage in present value calculations in such analysis.

Accepted Answer

A) True 
 B)False

Question 16

Generally, equivalent annual cost analyses show that the longer you need an asset, the more likely it is that it is cheaper to buy rather than lease an asset.

Accepted Answer

A) True 
 B)False

Question 17

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 18

Which one of the following is not a cash flow item in financial lease analysis?

Accepted Answer

A) The lessor's repayment schedule for financing the asset 
B) The value of the salvage to the lessor 
C) The CCA tax shelters of the lessor 
D) The lease payment's tax shelter impacts for the lessee 
A) The lessor's repayment schedule for financing the asset 
B) The value of the salvage to the lessor 
C) The CCA tax shelters of the lessor 
D) The lease payment's tax shelter impacts for the lessee

Question 19

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 20

Describe how risk plays a role in financial lease analysis, particularly in discount rates, salvage values, maintenance costs and insolvency circumstances.

Accepted Answer

Risk pervades lease analysis because of

Exam 17: Payout Policy

Which one of the following conditions is not a single requirement for verifying a financial lease according to Canadian accounting standards?

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

If an asset has a positive salvage of $1,000, exactly equal to UCC, then the lease analysis for an asset alone in its pool will show the following cash flows for that phenomenon.

In a net lease:

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%?

A sale and leaseback arrangement transfers ownership from a user to a lessor who then leases the asset back to the former owner.

If the present value of financial lease payments were $100,000, this capitalized amount would appear:

The appropriate discount rate for financial lease analysis is:

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

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%.

115.Calculate the net cash flow of lease, given lease payments of $10,500; lease payment tax benefits of $4,150; and CCA tax shield of $2,200

A lessor and lessee have the same exposure to financial risk.

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

Since salvage is more risky than other lease analysis cash flows, it is logical, though not always practical, to use a higher discount rate for salvage in present value calculations in such analysis.

Generally, equivalent annual cost analyses show that the longer you need an asset, the more likely it is that it is cheaper to buy rather than lease an asset.

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

Which one of the following is not a cash flow item in financial lease analysis?

Describe how risk plays a role in financial lease analysis, particularly in discount rates, salvage values, maintenance costs and insolvency circumstances.

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 Policy

Long-Term Financial Planning

Short-Term Financial Planning

Working Capital Management

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

Conclusion

What We Do and Do Not Know About Finance

Filters