Question 1

Leasing is a financial arrangement between a lessor, or owner, and a lessee or user of an asset.

Accepted Answer

A) True 
 B)False

Question 2

If a lease analysis shows exactly the same present value as an equivalent loan, the lessee should:

Accepted Answer

A) Choose to lease or buy based on other criteria 
B) Lease, since there are more tax shelters 
C) Buy, because the salvage might be bigger than estimated 
D) Neither lease nor buy, since the asset choice is clearly wrong 
A) Choose to lease or buy based on other criteria 
B) Lease, since there are more tax shelters 
C) Buy, because the salvage might be bigger than estimated 
D) Neither lease nor buy, since the asset choice is clearly wrong

Question 3

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 4

As a practical matter, the lessee uses a single discount rate for lease analysis, but a more refined approach would do which of the following?

Accepted Answer

A) Use a different discount rate for every line on the lease analysis' cash flows, and so reflect differing risk for each cash item 
B) Use a zero discount rate for the lease payment, a high rate only for the CCA tax benefits, and a middle rate for the other cash flows 
C) Use one discount rate for the lease tax shelter, and another for the other cash flows 
D) Use a low, middle, and high discount rate and pick the average result 
A) Use a different discount rate for every line on the lease analysis' cash flows, and so reflect differing risk for each cash item 
B) Use a zero discount rate for the lease payment, a high rate only for the CCA tax benefits, and a middle rate for the other cash flows 
C) Use one discount rate for the lease tax shelter, and another for the other cash flows 
D) Use a low, middle, and high discount rate and pick the average result

Question 5

Which of the following statements is not true of a financial lease?

Accepted Answer

A) It can be cancelled after the equipment is no longer needed 
B) It is a source of financing 
C) It is binding obligation for the lessee 
D) It lessee has the asset for most of its economic life 
A) It can be cancelled after the equipment is no longer needed 
B) It is a source of financing 
C) It is binding obligation for the lessee 
D) It lessee has the asset for most of its economic life

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

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

Question 9

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 10

The lessee in a financial lease bears the most of the same risks and rewards as ownership except:

Accepted Answer

A) He doesn't know how large his lease payments are 
B) He has no tax shelter for his cash outflows 
C) He has no access to capital gain from an extraordinary salvage value 
D) He can cancel his obligations to a lessor with 30 days' notice 
A) He doesn't know how large his lease payments are 
B) He has no tax shelter for his cash outflows 
C) He has no access to capital gain from an extraordinary salvage value 
D) He can cancel his obligations to a lessor with 30 days' notice

Question 11

A financial lease is also called a full-payout lease because:

Accepted Answer

A) Lessee agrees to pay the full amount of the lease up front 
B) Lessor agrees to pay out the lease if the lessee defaults 
C) Lessee pays for full cost of the asset in present value terms 
D) Payout of the lease is guaranteed by insurance 
A) Lessee agrees to pay the full amount of the lease up front 
B) Lessor agrees to pay out the lease if the lessee defaults 
C) Lessee pays for full cost of the asset in present value terms 
D) Payout of the lease is guaranteed by insurance

Question 12

Lease standardization helps justify leasing because:

Accepted Answer

A) It makes all lessors pay the same lease payments 
B) It lowers costs through standardized leased asset and security evaluations 
C) It makes it possible for lessors to investigate lessees more thoroughly 
D) It helps lessees to select similar assets 
A) It makes all lessors pay the same lease payments 
B) It lowers costs through standardized leased asset and security evaluations 
C) It makes it possible for lessors to investigate lessees more thoroughly 
D) It helps lessees to select similar assets

Question 13

Some assets are almost impossible to lease short-term because:

Accepted Answer

A) They are too expensive 
B) The assets are hard to transport for use 
C) The lessees don't want pay enough 
D) The assets to be leased are too susceptible to damage and abuse 
A) They are too expensive 
B) The assets are hard to transport for use 
C) The lessees don't want pay enough 
D) The assets to be leased are too susceptible to damage and abuse

Question 14

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 15

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 16

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 17

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 18

If the lease payments of the $800,000 asset described in Question 57 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 19

If a lessor paid $800,000 for an asset, how would the lessee treat this amount in his financial lease analysis?

Accepted Answer

A) Lessor would ignore it, since it is a lessor cost 
B) Lessor would treat it as a cash inflow, since he avoids it by leasing 
C) Lessor would amortize it over the lease life as an expense 
D) Lessor would discount it by his cost of capital 
A) Lessor would ignore it, since it is a lessor cost 
B) Lessor would treat it as a cash inflow, since he avoids it by leasing 
C) Lessor would amortize it over the lease life as an expense 
D) Lessor would discount it by his cost of capital

Question 20

A sensible, not dubious, reason for a lease would revolve around preserving capital through leasing rather than putting up the full price through owning.

Accepted Answer

A) True 
 B)False

Exam 17: Payout Policy

Leasing is a financial arrangement between a lessor, or owner, and a lessee or user of an asset.

If a lease analysis shows exactly the same present value as an equivalent loan, the lessee should:

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.

As a practical matter, the lessee uses a single discount rate for lease analysis, but a more refined approach would do which of the following?

Which of the following statements is not true of a financial lease?

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

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

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.

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

The lessee in a financial lease bears the most of the same risks and rewards as ownership except:

A financial lease is also called a full-payout lease because:

Lease standardization helps justify leasing because:

Some assets are almost impossible to lease short-term because:

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:

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

Equipment manufacturers lease out equipment because:

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

If the lease payments of the $800,000 asset described in Question 57 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%.

If a lessor paid $800,000 for an asset, how would the lessee treat this amount in his financial lease analysis?

A sensible, not dubious, reason for a lease would revolve around preserving capital through leasing rather than putting up the full price through owning.

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

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