Question 1

An advantage of leasing is that the lessor does not own the asset and can cancel:

Accepted Answer

A)  only financial leases. 
B)  only operating leases. 
C)  only capital leases. 
D)  any kind of leases anytime. 
E)  None of these. 
A)  only financial leases. 
B)  only operating leases. 
C)  only capital leases. 
D)  any kind of leases anytime. 
E)  None of these. B

Question 2

Your firm is considering leasing a new radiographic device. The lease lasts for 3 years. The lease calls for 4 payments of $25,000 per year with the first payment occurring immediately. The computer would cost $140,000 to buy and would be straight-line depreciated to a zero salvage value over 3 years. The actual salvage value is negligible because of technological obsolescence. The firm can borrow at a rate of 12%. The corporate tax rate is 40%. What is the after-tax cash flow from leasing relative to the after-tax cash flow from purchasing in years 1-3?

Accepted Answer

A)  -$1,200 
B)  -$1,577 
C)  -$3,667 
D)  -$13,000 
E)  None of these. 
A)  -$1,200 
B)  -$1,577 
C)  -$3,667 
D)  -$13,000 
E)  None of these. C

Question 3

Your firm is considering leasing a new computer. The lease lasts for 9 years. The lease calls for 10 payments of $1,000 per year with the first payment occurring immediately. The computer would cost $7,650 to buy and would be straight-line depreciated to a zero salvage value over 9 years. The actual salvage value is negligible because of technological obsolescence. The firm can borrow at a rate of 8%. The corporate tax rate is 30%. What is the NPV of the lease relative to the purchase?

Accepted Answer

A)  -$1,039.78 
B)  $339.78 
C)  $360.22 
D)  $6,610.22 
E)  None of these. 
A)  -$1,039.78 
B)  $339.78 
C)  $360.22 
D)  $6,610.22 
E)  None of these. B

Question 4

The Blank Button Company is considering the purchase of a new machine for $30,000. The machine is expected to save the firm $12,500 per year in operating costs over a 5 year period,and can be depreciated on a straight-line basis to a zero salvage value over its life. Alternatively,the firm can lease the machine for $6,500 per year for 5 years,with the first payment due in 1 year. The firm's tax rate is 34%,and its cost of debt is 10%. Calculate the NPV of the lease versus the purchase decision. Calculate the reservation payment of the lessee.

Accepted Answer

@#IMG-DLM& NPV of Lease versus Buy: $-30

Question 5

Your firm is considering leasing a new computer. The lease lasts for 9 years. The lease calls for 10 payments of $1,000 per year with the first payment occurring immediately. The computer would cost $7,650 to buy and would be straight-line depreciated to a zero salvage value over 9 years. The actual salvage value is negligible because of technological obsolescence. The firm can borrow at a rate of 8%. The corporate tax rate is 30%. What would the after-tax cash flow in year 9 be if the asset had a residual value of $500 (ignoring any possible risk differences)?

Accepted Answer

A)  -$605 
B)  -$955 
C)  -$1,455 
D)  -$1,305 
E)  None of these. 
A)  -$605 
B)  -$955 
C)  -$1,455 
D)  -$1,305 
E)  None of these.

Question 6

Your firm is considering leasing a radiographic x-ray machine. The lease lasts for 3 years. The lease calls for 4 payments of $25,000 per year with the first payment occurring immediately. The computer would cost $140,000 to buy and would be straight-line depreciated to a zero salvage value over 3 years. The actual salvage value is negligible. The firm can borrow at a rate of 12%. The corporate tax rate is 40%. This lease would be classified as a(n):

Accepted Answer

A)  operating lease because the asset will be obsolete. 
B)  operating lease because there is no amortization. 
C)  leveraged lease because it is being financed. 
D)  capital lease because the lease life is greater than 75% of the economic life. 
E)  sale and leaseback because the company gets full use of the asset. 
A)  operating lease because the asset will be obsolete. 
B)  operating lease because there is no amortization. 
C)  leveraged lease because it is being financed. 
D)  capital lease because the lease life is greater than 75% of the economic life. 
E)  sale and leaseback because the company gets full use of the asset.

Question 7

The appropriate discount rate for valuing a financial lease is:

Accepted Answer

A)  the firm's after-tax weighted average cost of capital. 
B)  the after-tax required return on assets of risks similar to the leased asset. 
C)  the after-tax cost of secured borrowing. 
D)  Either the firm's after-tax weighted average cost of capital or the after-tax required return on assets of risks similar to the leased asset. 
E)  All of 
A)  the firm's after-tax weighted average cost of capital. 
B)  the after-tax required return on assets of risks similar to the leased asset. 
C)  the after-tax cost of secured borrowing. 
D)  Either the firm's after-tax weighted average cost of capital or the after-tax required return on assets of risks similar to the leased asset. 
E)  All of

Question 8

Which of the following is not an implication of FASB 13,Accounting for Leases?

Accepted Answer

A)  FASB 13 requires that the PV of the lease payments appear on the right hand side of the balance sheet. 
B)  FASB 13 requires that the present value of the asset appear on the left hand side of the balance sheet. 
C)  FASB 13 allows for off-balance-sheet financing for operating leases. 
D)  All of these. 
E)  None of these. 
A)  FASB 13 requires that the PV of the lease payments appear on the right hand side of the balance sheet. 
B)  FASB 13 requires that the present value of the asset appear on the left hand side of the balance sheet. 
C)  FASB 13 allows for off-balance-sheet financing for operating leases. 
D)  All of these. 
E)  None of these.

Question 9

Capital leases would show up on the balance sheet of the firm in which manner for a six year machinery lease worth $700,000?

Accepted Answer

A)  Capital leases do not have to be put on the balance sheet; only financial leases do. 
B)  Asset - Machinery $700,000; Liabilities - Long Term debt $700,000 because of debt displacement. 
C)  Asset - Assets under Capital Lease $700,000; Liabilities - Obligations under Capital Lease $700,000. 
D)  Assets - Assets under Capital Lease $700,000; Liabilities - Long Term Debt $700,000 because of debt displacement. 
E)  None of these. 
A)  Capital leases do not have to be put on the balance sheet; only financial leases do. 
B)  Asset - Machinery $700,000; Liabilities - Long Term debt $700,000 because of debt displacement. 
C)  Asset - Assets under Capital Lease $700,000; Liabilities - Obligations under Capital Lease $700,000. 
D)  Assets - Assets under Capital Lease $700,000; Liabilities - Long Term Debt $700,000 because of debt displacement. 
E)  None of these.

Question 10

Your firm is considering leasing a radiographic x-ray machine. The lease lasts for 3 years. The lease calls for 4 payments of $25,000 per year with the first payment occurring immediately. The computer would cost $140,000 to buy and would be straight-line depreciated to a zero salvage value over 3 years. The actual salvage value is negligible. The firm can borrow at a rate of 12%. The corporate tax rate is 40%. What is the NPV of the lease relative to the purchase?

Accepted Answer

A)  -$125,000 
B)  $115,412 
C)  $75,000 
D)  $125,000 
E)  None of these. 
A)  -$125,000 
B)  $115,412 
C)  $75,000 
D)  $125,000 
E)  None of these.

Question 11

To meet IRS guidelines for leasing,the lease should:

Accepted Answer

A)  limit the lessee's right to issue debt or pay dividends while the lease is operative. 
B)  not limit the lessee's right to issue debt or pay dividends while the lease is operative. 
C)  pay a very high return to the lessor. 
D)  transfer ownership of the asset at the end of the lease at below fair market value. 
E)  be over 30 years. 
A)  limit the lessee's right to issue debt or pay dividends while the lease is operative. 
B)  not limit the lessee's right to issue debt or pay dividends while the lease is operative. 
C)  pay a very high return to the lessor. 
D)  transfer ownership of the asset at the end of the lease at below fair market value. 
E)  be over 30 years.

Question 12

Your firm is considering leasing a new robotic milling control system. The lease lasts for 5 years. The lease calls for 6 payments of $300,000 per year with the first payment occurring at lease inception. The system would cost $1,050,000 to buy and would be straight-line depreciated to a zero salvage value. The actual salvage value is zero. The firm can borrow at 8%,and the corporate tax rate is 34%. What is the NPV of the lease?

Accepted Answer

A)  -$111,690 
B)  -$295,040 
C)  -$305,388 
D)  -$309,690 
E)  None of these. 
A)  -$111,690 
B)  -$295,040 
C)  -$305,388 
D)  -$309,690 
E)  None of these.

Question 13

The Plastic Iron Company has decided to acquire a new electronic milling machine. Plastic Iron can purchase the machine for $87,000 which has an expected life of 8 years and will be depreciated using 7 class MACRS rates of .1428,.2449,.1749,.125,.0892,.0892,.0892 and any remainder in year 8. Miller Leasing has offered to lease the machine to Plastic Iron for $14,000 a year for 8 years. Plastic Iron has an 18.64% cost of equity,12% cost of debt,a 1:1 D/E ratio and faces a 34% marginal tax rate. Should they lease or buy?
 Show all work.

Accepted Answer

@#IMG-DLM& Kd_AT = .12(1 - .34) = .12(.66) = .0792 =

Question 14

Your firm is considering leasing a new radiographic device. The lease lasts for 3 years. The lease calls for 4 payments of $25,000 per year with the first payment occurring immediately. The computer would cost $140,000 to buy and would be straight-line depreciated to a zero salvage value over 3 years. The actual salvage value is negligible because of technological obsolescence. The firm can borrow at a rate of 12%. The corporate tax rate is 40%. This lease would be classified as a(n):

Accepted Answer

A)  operating lease because the asset will be obsolete. 
B)  operating lease because there is no amortization. 
C)  leveraged lease because it is being financed. 
D)  capital lease because the lease life is greater than 75% of the economic life. 
E)  sale and leaseback because the company gets full use of the asset. 
A)  operating lease because the asset will be obsolete. 
B)  operating lease because there is no amortization. 
C)  leveraged lease because it is being financed. 
D)  capital lease because the lease life is greater than 75% of the economic life. 
E)  sale and leaseback because the company gets full use of the asset.

Question 15

If the lessor borrows much of the purchase price of a leased asset,the lease is called:

Accepted Answer

A)  a leveraged lease. 
B)  a sale-and-leaseback. 
C)  a capital lease. 
D)  a nonrecourse lease. 
E)  None of these. 
A)  a leveraged lease. 
B)  a sale-and-leaseback. 
C)  a capital lease. 
D)  a nonrecourse lease. 
E)  None of these.

Question 16

Your firm is considering leasing a new radiographic device. The lease lasts for 3 years. The lease calls for 4 payments of $25,000 per year with the first payment occurring immediately. The computer would cost $140,000 to buy and would be straight-line depreciated to a zero salvage value over 3 years. The actual salvage value is negligible because of technological obsolescence. The firm can borrow at a rate of 12%. The corporate tax rate is 40%. What would the after-tax cash flow in year 3 be if the asset had a residual value of $1,000 (ignoring any possible risk differences)?

Accepted Answer

A)  $4,067 
B)  $1,000 
C)  -$1,000 
D)  -$4,067 
E)  None of these. 
A)  $4,067 
B)  $1,000 
C)  -$1,000 
D)  -$4,067 
E)  None of these.

Question 17

Your firm is considering leasing a radiographic x-ray machine. The lease lasts for 3 years. The lease calls for 4 payments of $25,000 per year with the first payment occurring immediately. The computer would cost $140,000 to buy and would be straight-line depreciated to a zero salvage value over 3 years. The actual salvage value is negligible. The firm can borrow at a rate of 12%. The corporate tax rate is 40%. What is the after-tax cash flow from leasing relative to the after-tax cash flow from purchasing in years 1-3?

Accepted Answer

A)  -$15,000 
B)  -$3,667 
C)  -$2,750 
D)  -$1,500 
E)  None of these. 
A)  -$15,000 
B)  -$3,667 
C)  -$2,750 
D)  -$1,500 
E)  None of these.

Question 18

The reason the IRS is most concerned about lease contracts is:

Accepted Answer

A)  firms that lease generally pay no taxes. 
B)  that leasing usually leads to bankruptcy. 
C)  that leases can be set up solely to avoid taxes. 
D)  because leasing leads to off-balance-sheet-financing. 
E)  All of 
A)  firms that lease generally pay no taxes. 
B)  that leasing usually leads to bankruptcy. 
C)  that leases can be set up solely to avoid taxes. 
D)  because leasing leads to off-balance-sheet-financing. 
E)  All of

Question 19

The price or lease payment that the lessee sets as their bound is known as:

Accepted Answer

A)  the present value of the tax shields. 
B)  the reservation payment, LMIN. 
C)  the present value of operating savings. 
D)  the reservation payment, LMAX. 
E)  None of these. 
A)  the present value of the tax shields. 
B)  the reservation payment, LMIN. 
C)  the present value of operating savings. 
D)  the reservation payment, LMAX. 
E)  None of these.

Question 20

Your firm is considering leasing a radiographic x-ray machine. The lease lasts for 3 years. The lease calls for 4 payments of $25,000 per year with the first payment occurring immediately. The computer would cost $140,000 to buy and would be straight-line depreciated to a zero salvage value over 3 years. The actual salvage value is negligible. The firm can borrow at a rate of 12%. The corporate tax rate is 40%. What would the after-tax cash flow in year 3 be if the asset had a residual value of $1,000 (ignoring any possible risk differences)?

Accepted Answer

A)  $600 
B)  $1,000 
C)  $4,067 
D)  -$4,067 
E)  None of these. 
A)  $600 
B)  $1,000 
C)  $4,067 
D)  -$4,067 
E)  None of these.

An advantage of leasing is that the lessor does not own the asset and can cancel:

The appropriate discount rate for valuing a financial lease is:

Which of the following is not an implication of FASB 13,Accounting for Leases?

Capital leases would show up on the balance sheet of the firm in which manner for a six year machinery lease worth $700,000?

To meet IRS guidelines for leasing,the lease should:

If the lessor borrows much of the purchase price of a leased asset,the lease is called:

The reason the IRS is most concerned about lease contracts is:

The price or lease payment that the lessee sets as their bound is known as:

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements Analysis and Financial Models

Discounted Cash Flow Valuation

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, Real Options, and Capital Budgeting

Interest Rates and Bond Valuation

Stock Valuation

Risk and Return: Lessons From Market History

Return and Risk: the Capital Asset Pricing Model Capm

An Alternative View of Risk and Return: The Arbitrage Pricing Theory

Risk, Cost of Capital, and Valuation

Efficient Capital Markets and Behavioral Challenges

Long-Term Financing

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Raising Capital

Options and Corporate Finance

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Derivatives and Hedging Risk

Short-Term Finance and Planning

Cash Management

Credit and Inventory Management

Mergers, Acquisitions, and Divestitures

Financial Distress

International Corporate Finance

Filters

Exam 21: Leasing

An advantage of leasing is that the lessor does not own the asset and can cancel:

The appropriate discount rate for valuing a financial lease is:

Which of the following is not an implication of FASB 13,Accounting for Leases?

Capital leases would show up on the balance sheet of the firm in which manner for a six year machinery lease worth $700,000?

To meet IRS guidelines for leasing,the lease should:

If the lessor borrows much of the purchase price of a leased asset,the lease is called:

The reason the IRS is most concerned about lease contracts is:

The price or lease payment that the lessee sets as their bound is known as:

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements Analysis and Financial Models

Discounted Cash Flow Valuation

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, Real Options, and Capital Budgeting

Interest Rates and Bond Valuation

Stock Valuation

Risk and Return: Lessons From Market History

Return and Risk: the Capital Asset Pricing Model Capm

An Alternative View of Risk and Return: The Arbitrage Pricing Theory

Risk, Cost of Capital, and Valuation

Efficient Capital Markets and Behavioral Challenges

Long-Term Financing

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Raising Capital

Options and Corporate Finance

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Derivatives and Hedging Risk

Short-Term Finance and Planning

Cash Management

Credit and Inventory Management

Mergers, Acquisitions, and Divestitures

Financial Distress

International Corporate Finance

Filters