Question 1

An operating lease's primary characteristics are:

Accepted Answer

A)  fully amortized, lessee maintains equipment and there is no cancellation clause. 
B)  not fully amortized, lessor maintains equipment and there is a cancellation clause. 
C)  fully amortized, lessor maintains equipment and there is a cancellation clause. 
D)  not fully amortized, lessor maintains equipment and there is not cancellation clause. 
E)  fully amortized, lessee maintains equipment and lessee can acquire assets at end of lease for fair market valuE. 
A)  fully amortized, lessee maintains equipment and there is no cancellation clause. 
B)  not fully amortized, lessor maintains equipment and there is a cancellation clause. 
C)  fully amortized, lessor maintains equipment and there is a cancellation clause. 
D)  not fully amortized, lessor maintains equipment and there is not cancellation clause. 
E)  fully amortized, lessee maintains equipment and lessee can acquire assets at end of lease for fair market valuE.

Question 2

A financial lease has the following as its primary characteristics:

Accepted Answer

A)  is fully amortized, lessee maintains equipment and there is no renewal clause and no cancellation clause. 
B)  is not fully amortized, lessor maintains equipment and there is a renewal clause but no cancellation clause. 
C)  is fully amortized, lessor maintains equipment and there is a renewal clause and a no cancellation clause. 
D)  is not fully amortized, lessor maintains equipment and there is a renewal clause. 
E)  is fully amortized, lessee maintains equipment and there is a renewal clause and a no cancellation clausE. 
A)  is fully amortized, lessee maintains equipment and there is no renewal clause and no cancellation clause. 
B)  is not fully amortized, lessor maintains equipment and there is a renewal clause but no cancellation clause. 
C)  is fully amortized, lessor maintains equipment and there is a renewal clause and a no cancellation clause. 
D)  is not fully amortized, lessor maintains equipment and there is a renewal clause. 
E)  is fully amortized, lessee maintains equipment and there is a renewal clause and a no cancellation clausE.

Question 3

If a lease is for 35 years,it is regarded as a:

Accepted Answer

A)  financial lease. 
B)  operating lease. 
C)  capital lease. 
D)  conditional sale. 
E)  sale and leaseback. 
A)  financial lease. 
B)  operating lease. 
C)  capital lease. 
D)  conditional sale. 
E)  sale and leaseback.

Question 4

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 after-tax cash flow in years 1 through 5?

Accepted Answer

A)  -$126,600 
B)  -$198,000 
C)  -$269,400 
D)  -$287,250 
E)  None of these. 
A)  -$126,600 
B)  -$198,000 
C)  -$269,400 
D)  -$287,250 
E)  None of these.

Question 5

Which of the following is probably a good reason for leasing instead of buying?

Accepted Answer

A)  Leasing provides 100% financing. 
B)  Leasing is not considered a form of debt financing. 
C)  Leasing may increase EPS relative to buying. 
D)  All of these are good reasons. 
E)  None of these. is a good reason. 
A)  Leasing provides 100% financing. 
B)  Leasing is not considered a form of debt financing. 
C)  Leasing may increase EPS relative to buying. 
D)  All of these are good reasons. 
E)  None of these. is a good reason.

Question 6

A leveraged lease typically involves a non-recourse loan in which:

Accepted Answer

A)  the lessee's payments go directly to the lender in case of default. 
B)  the lessor is not obligated in case of default. 
C)  the third party lenders have a first lien on the assets. 
D)  All of these. 
E)  None of these. 
A)  the lessee's payments go directly to the lender in case of default. 
B)  the lessor is not obligated in case of default. 
C)  the third party lenders have a first lien on the assets. 
D)  All of these. 
E)  None of these.

Question 7

In a lease arrangement,the user of the asset is:

Accepted Answer

A)  the lesser. 
B)  the lessee. 
C)  the lessor. 
D)  the leaser. 
E)  None of these. 
A)  the lesser. 
B)  the lessee. 
C)  the lessor. 
D)  the leaser. 
E)  None of these.

Question 8

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 appropriate discount rate for valuing the lease?

Accepted Answer

A)  2.72% 
B)  5.28% 
C)  8.00% 
D)  12.12% 
E)  None of these. 
A)  2.72% 
B)  5.28% 
C)  8.00% 
D)  12.12% 
E)  None of these.

Question 9

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 after-tax cash flow from leasing in year 0?

Accepted Answer

A)  $300,000 
B)  $495,000 
C)  $852,000 
D)  $948,000 
E)  None of these. 
A)  $300,000 
B)  $495,000 
C)  $852,000 
D)  $948,000 
E)  None of these.

Question 10

Which of the following would not be a characteristic of a financial lease?

Accepted Answer

A)  They are not usually fully amortized. 
B)  They usually do not have maintenance necessary for the leased assets. 
C)  They usually do not include a cancellation option. 
D)  The lessee usually has the right to renew the lease at expiration. 
E)  All of these are characteristics of financial leases. 
A)  They are not usually fully amortized. 
B)  They usually do not have maintenance necessary for the leased assets. 
C)  They usually do not include a cancellation option. 
D)  The lessee usually has the right to renew the lease at expiration. 
E)  All of these are characteristics of financial leases.

Question 11

A lease is likely to be most beneficial to both parties when:

Accepted Answer

A)  the lessor's tax rate is lower than the lessee's. 
B)  the lessor's tax rate is higher than the lessee's. 
C)  the lessor's tax rate is equal to the lessee's. 
D)  a lease cannot be beneficial to both parties. 
E)  a lease always has zero NPV, so both parties always break even. 
A)  the lessor's tax rate is lower than the lessee's. 
B)  the lessor's tax rate is higher than the lessee's. 
C)  the lessor's tax rate is equal to the lessee's. 
D)  a lease cannot be beneficial to both parties. 
E)  a lease always has zero NPV, so both parties always break even.

Question 12

The WACC is not used in the lease versus purchase decision because:

Accepted Answer

A)  the WACC was used in the decision to acquire the asset, this is only a financing decision. 
B)  the WACC is used only when a lease alone is considered and not a lease versus purchase. 
C)  the WACC does not include the lease cost of capital and therefore should not be used. 
D)  tax rates of the lessor may be different than the lessee and therefore the WACC is incorrect. 
E)  when a bank arranges a lease they do not consider the lessee's cost of capital. 
A)  the WACC was used in the decision to acquire the asset, this is only a financing decision. 
B)  the WACC is used only when a lease alone is considered and not a lease versus purchase. 
C)  the WACC does not include the lease cost of capital and therefore should not be used. 
D)  tax rates of the lessor may be different than the lessee and therefore the WACC is incorrect. 
E)  when a bank arranges a lease they do not consider the lessee's cost of capital.

Question 13

A lease with high payments early in its life which then decline to termination would:

Accepted Answer

A)  provide greater cash flow to the lessee in the beginning years. 
B)  be evidence of tax avoidance and not acceptable to the IRS. 
C)  be qualified as a capital lease under FASB 13. 
D)  provide a lower residual value and thus ensure a bargain-purchase price option. 
E)  All of 
A)  provide greater cash flow to the lessee in the beginning years. 
B)  be evidence of tax avoidance and not acceptable to the IRS. 
C)  be qualified as a capital lease under FASB 13. 
D)  provide a lower residual value and thus ensure a bargain-purchase price option. 
E)  All of

Question 14

The city of Plainview sold some buildings and used the proceeds to improve its financial position. The city then leased the buildings back in order to continue to use these facilities. This is an example of:

Accepted Answer

A)  an operating lease. 
B)  a short-term lease. 
C)  a sale and leaseback. 
D)  a fully amortized lease. 
E)  None of these. 
A)  an operating lease. 
B)  a short-term lease. 
C)  a sale and leaseback. 
D)  a fully amortized lease. 
E)  None of these.

Question 15

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%. 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.

Exam 21: Leasing

An operating lease's primary characteristics are:

A financial lease has the following as its primary characteristics:

If a lease is for 35 years,it is regarded as a:

Which of the following is probably a good reason for leasing instead of buying?

A leveraged lease typically involves a non-recourse loan in which:

In a lease arrangement,the user of the asset is:

Which of the following would not be a characteristic of a financial lease?

A lease is likely to be most beneficial to both parties when:

The WACC is not used in the lease versus purchase decision because:

A lease with high payments early in its life which then decline to termination would:

The city of Plainview sold some buildings and used the proceeds to improve its financial position. The city then leased the buildings back in order to continue to use these facilities. This is an example of:

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

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