Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

Even with lease capitalization, the financial positions of lessors and lessees differ.Which of the following statements does not support that assertion?

Accepted Answer

A) The asset choice is influenced by the method of financing 
B) Secured creditors are more exposed to risk in the lease than are lessees 
C) In the face of default, the lessor's exposure to loss is larger than the lessee's 
D) The lessor stands to profit from unexpectedly high salvage proceeds, while the lessee does not 
A) The asset choice is influenced by the method of financing 
B) Secured creditors are more exposed to risk in the lease than are lessees 
C) In the face of default, the lessor's exposure to loss is larger than the lessee's 
D) The lessor stands to profit from unexpectedly high salvage proceeds, while the lessee does not

Question 3

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 4

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 5

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 6

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 7

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

Question 8

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 9

If a lessor has a tax bracket much higher than a lessee's, and the CCA tax shields occur early in the lease, there is little incentive for a lessor and lessee to construct a lease to their mutual after-tax benefit.

Accepted Answer

A) True 
 B)False

Question 10

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 11

The best situation to encourage leasing would be one in which:

Accepted Answer

A) The lease payments are larger in the early part of a short contract 
B) The interest rate is low 
C) The lessee's tax rate is lower than the lessor's 
D) The CCA tax shield occurs late in the lease period 
A) The lease payments are larger in the early part of a short contract 
B) The interest rate is low 
C) The lessee's tax rate is lower than the lessor's 
D) The CCA tax shield occurs late in the lease period

Question 12

Which of the following are specific tests that the Canada Revenue Agency will apply to determine if a particular lease meets the definition of a capital lease? 1.The lease term is equal to 75% or more of the economic life of the leased property.
2)The present value of the minimum lease payments is equal to 70% or more of the fair value of the leased property at the inception of the lease.
3)Provisions are made such that ownership of the leased property is transferred to the lessee at the end of the lease term.

Accepted Answer

A) 1 only 
B) 1 and 2 
C) 1 and 3 
D) 2 and 3 
A) 1 only 
B) 1 and 2 
C) 1 and 3 
D) 2 and 3

Question 13

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 14

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 15

What is the undepreciated capital cost of Question 57's $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 16

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

Accepted Answer

A) True 
 B)False

Question 17

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 18

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

Question 19

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 20

The salvage value of a leased asset affects the cost of the lease through the tax shields associated with owning.

Accepted Answer

A) True 
 B)False

Exam 17: Payout Policy

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

Even with lease capitalization, the financial positions of lessors and lessees differ.Which of the following statements does not support that assertion?

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.

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

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

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):

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

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.

If a lessor has a tax bracket much higher than a lessee's, and the CCA tax shields occur early in the lease, there is little incentive for a lessor and lessee to construct a lease to their mutual after-tax benefit.

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

The best situation to encourage leasing would be one in which:

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

An operating lease is cancelable because:

What is the undepreciated capital cost of Question 57's $800,000 asset after five CCA calculations of 30% declining balance, with the half-year rule?

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

Which of the following is not a reason for leasing?

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

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

The salvage value of a leased asset affects the cost of the lease through the tax shields associated with 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

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.