Question 1

What are some "good" reasons for opting to lease rather than purchase an asset?

Accepted Answer

Students should provide reasons similar to those listed in the textbook,which are:
1.Taxes may be reduced by leasing.
2.The lease contract may reduce uncertainty.
3.Transaction costs may be lower with leasing.
4.Leasing may require fewer restrictive covenants than secured borrowing.
5.Leasing may encumber fewer assets than secured borrowing.

Question 2

Cool Treats is considering either leasing or buying a new freezer unit.The lessor will charge $11,900 a year for a 2-year lease.The purchase price is $32,000.The freezer has a 2-year life after which time it is expected to have a resale value of $9,000.Cool Treats uses straight-line depreciation,borrows money at 8 percent,and has sufficient tax loss carryovers to offset any potential taxable income the firm might have over the next 5 years.What is the net advantage to leasing?

Accepted Answer

A) $2,167 
B) $2,384 
C) $2,573 
D) $2,710 
E) $3,063 
A) $2,167 
B) $2,384 
C) $2,573 
D) $2,710 
E) $3,063 E

Question 3

A financial lease in which the lessor is the owner for tax purposes is called a(n)_____ lease.

Accepted Answer

A) open 
B) straight 
C) operating 
D) tax-oriented 
E) tax-exempt 
A) open 
B) straight 
C) operating 
D) tax-oriented 
E) tax-exempt D

Question 4

If a lessor borrows money on a nonrecourse basis to purchase an asset that will be leased to another party,then:

Accepted Answer

A) the lessor is responsible for the payments on the borrowed funds whether or not the lessee pays the lease payments. 
B) the lessee must pay both the lease payment and the loan payment. 
C) the loan is considered paid in full if the lessee discontinues making the lease payments or terminates the lease early. 
D) the lessor is only obligated to make loan payments as long as the lessor is collecting the lease payments. 
E) the lessor must pursue the lessee if the lessee fails to make the agreed upon lease payments. 
A) the lessor is responsible for the payments on the borrowed funds whether or not the lessee pays the lease payments. 
B) the lessee must pay both the lease payment and the loan payment. 
C) the loan is considered paid in full if the lessee discontinues making the lease payments or terminates the lease early. 
D) the lessor is only obligated to make loan payments as long as the lessor is collecting the lease payments. 
E) the lessor must pursue the lessee if the lessee fails to make the agreed upon lease payments.

Question 5

You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a very common practice with expensive,high-tech equipment).The scanner costs $2 million and it would be depreciated straight-line to zero over 4 years.Because of radiation contamination,it will actually be completely valueless in 4 years.Assume the tax rate is 33 percent.You can borrow at 6 percent before taxes.How much would the lease payment have to be in order for both the lessor and the lessee to be indifferent about the lease?

Accepted Answer

A) $500,000 
B) $521,909 
C) $552,200 
D) $563,333 
E) $576,477 
A) $500,000 
B) $521,909 
C) $552,200 
D) $563,333 
E) $576,477

Question 6

Ron leases a car from Uptown Motors and pays $225 a month as a lease payment.Which one of the following terms applies to Ron?

Accepted Answer

A) lessee 
B) lessor 
C) guarantor 
D) trustee 
E) manager 
A) lessee 
B) lessor 
C) guarantor 
D) trustee 
E) manager

Question 7

An operating lease:

Accepted Answer

A) is recorded at its net present value on the balance sheet. 
B) is recorded on the balance sheet as both an asset and a liability. 
C) is recorded at its estimated residual balance on the balance sheet. 
D) is reflected in the footnotes rather than on the balance sheet. 
E) does not appear either on a financial statement or in the footnotes. 
A) is recorded at its net present value on the balance sheet. 
B) is recorded on the balance sheet as both an asset and a liability. 
C) is recorded at its estimated residual balance on the balance sheet. 
D) is reflected in the footnotes rather than on the balance sheet. 
E) does not appear either on a financial statement or in the footnotes.

Question 8

Which of the following apply to the lessee of a sale and leaseback arrangement?
I.may have option to purchase asset at end of lease term
II.receives cash from the sale of the asset
III.maintains ownership rights
IV.uses the asset

Accepted Answer

A) I and IV only 
B) II and III only 
C) I, II, and IV only 
D) II, III, and IV only 
E) I, II, III, and IV 
A) I and IV only 
B) II and III only 
C) I, II, and IV only 
D) II, III, and IV only 
E) I, II, III, and IV

Question 9

National Event Coordinators is contemplating the acquisition of a new tent that will be used for major outdoor events.The purchase price is $147,000.The firm uses MACRS depreciation which allows for 33.33 percent,44.44 percent,14.82 percent,and 7.41 percent depreciation over years 1 to 4,respectively.The tent will be worthless after four years.The tent can be leased for four years at $42,500 a year.The firm can borrow money at 7.5 percent and has a 34 percent tax rate.What is the net advantage to leasing?

Accepted Answer

A) $1,789 
B) $1,862 
C) $1,922 
D) $2,087 
E) $2,127 
A) $1,789 
B) $1,862 
C) $1,922 
D) $2,087 
E) $2,127

Question 10

Baxter Contractors is evaluating the lease versus the purchase of a $329,000 machine.The machine will be depreciated using MACRS over a 4-year period,after which the machine will be worthless.MACRS allows for 33.33 percent,44.44 percent,14.82 percent,and 7.41 percent depreciation over years 1 to 4,respectively.The machine could be leased for $105,000 a year for 4 years.The firm can borrow money at 9.5 percent and has a 35 percent tax rate.The firm does not expect to pay any taxes for the next 5 years.What is the net advantage to leasing?

Accepted Answer

A) -$4,587 
B) -$7,471 
C) -$18,640 
D) -$21,651 
E) -$30,277 
A) -$4,587 
B) -$7,471 
C) -$18,640 
D) -$21,651 
E) -$30,277

Question 11

An asset costs $420,000 and will be depreciated in a straight-line manner over its 3-year life.It will have no salvage value.The corporate tax rate is 32 percent,and the cost of borrowing is 8 percent.What lease payment amount will make the lessee and the lessor equally well off?

Accepted Answer

A) $145,717.08 
B) $154,141.11 
C) $157,778.03 
D) $162,795.34 
E) $165,025.50 
A) $145,717.08 
B) $154,141.11 
C) $157,778.03 
D) $162,795.34 
E) $165,025.50

Question 12

J&K Enterprises is considering either leasing or buying some new equipment.The lease payments would be $3,800 a year.The purchase price is $19,900.The equipment has a 6-year life after which it is expected to have a resale value of $2,100.Your firm uses straight-line depreciation,borrows money at 11.5 percent,and has a 33 percent tax rate.What is the aftertax salvage value of the equipment?

Accepted Answer

A) $1,407 
B) $1,428 
C) $1,471 
D) $1,476 
E) $1,512 
A) $1,407 
B) $1,428 
C) $1,471 
D) $1,476 
E) $1,512

Question 13

Jamestown Supply is trying to decide whether to lease or buy some new equipment.The equipment costs $72,000,has a 4-year life,and will be worthless after the 4 years.The equipment will be replaced.The cost of borrowed funds is 9 percent and the tax rate is 34 percent.The equipment can be leased for $23,800 a year.What is the amount of the aftertax lease payment?

Accepted Answer

A) $13,897 
B) $14,250 
C) $14,667 
D) $15,708 
E) $15,820 
A) $13,897 
B) $14,250 
C) $14,667 
D) $15,708 
E) $15,820

Question 14

Which one of the following is most likely the primary reason why a lessee opts to lease an asset on a short-term basis rather than buy that asset?

Accepted Answer

A) keep the asset off the balance sheet 
B) tax avoidance 
C) lower total cost 
D) increased collateral 
E) nonrecourse protection 
A) keep the asset off the balance sheet 
B) tax avoidance 
C) lower total cost 
D) increased collateral 
E) nonrecourse protection

Question 15

Cross Town Express is contemplating the acquisition of some new equipment.The purchase price is $74,000.The equipment would be depreciated using MACRS depreciation which allows for 33.33 percent,44.44 percent,14.82 percent,and 7.41 percent depreciation over years 1 to 4,respectively.The equipment would be worthless after that time.The equipment can be leased for $19,100 a year for 4 years.The firm can borrow money at 9.5 percent and has a 28 percent tax rate.What is the incremental annual cash flow for year 3 if the company decides to lease the equipment rather than purchase it?

Accepted Answer

A) -$16,823 
B) -$15,797 
C) $14,312 
D) $15,797 
E) $16,823 
A) -$16,823 
B) -$15,797 
C) $14,312 
D) $15,797 
E) $16,823

Question 16

A financial lease:

Accepted Answer

A) is generally called a capital lease by accountants. 
B) requires the lessor to maintain the asset. 
C) is a partially amortized lease. 
D) is often called a single net lease. 
E) can generally be cancelled without penalty. 
A) is generally called a capital lease by accountants. 
B) requires the lessor to maintain the asset. 
C) is a partially amortized lease. 
D) is often called a single net lease. 
E) can generally be cancelled without penalty.

Question 17

A firm borrows money at 8.75 percent,uses straight-line depreciation,and has a 37 percent tax rate.The firm's break-even aftertax annual lease payment on a machine is $16,511.How much will the firm have to pay annually to the lessor to lease this machine?

Accepted Answer

A) $16,511 
B) $19,408 
C) $22,620 
D) $23,919 
E) $26,208 
A) $16,511 
B) $19,408 
C) $22,620 
D) $23,919 
E) $26,208

Question 18

Val's Pizzeria is contemplating the acquisition of some new commercial ovens.The purchase price is $39,000.The equipment will be depreciated based on MACRS depreciation which allows for 33.33 percent,44.44 percent,14.82 percent,and 7.41 percent depreciation over years 1 to 4,respectively.The equipment will be worthless at the end of 4 years.The equipment can be leased for $12,500 a year.The firm can borrow money at 8 percent and has a 35 percent tax rate.What is the amount of the depreciation tax shield in year 3?

Accepted Answer

A) $1,525.27 
B) $1,624.50 
C) $2,022.93 
D) $2,325.00 
E) $2,631.60 
A) $1,525.27 
B) $1,624.50 
C) $2,022.93 
D) $2,325.00 
E) $2,631.60

Question 19

Which one of the following will classify a lease as a capital lease for accounting purposes?

Accepted Answer

A) The lease transfers ownership of the asset to the lessee by the end of the lease. 
B) The lease term is 75 percent or less of the estimated economic life of the asset. 
C) The lessee can buy the asset at fair market value at the end of the lease. 
D) The initial present value of the lease payments equals or exceeds 80 percent of the fair market value of the asset. 
E) The total of the lease payments exceeds $100,000. 
A) The lease transfers ownership of the asset to the lessee by the end of the lease. 
B) The lease term is 75 percent or less of the estimated economic life of the asset. 
C) The lessee can buy the asset at fair market value at the end of the lease. 
D) The initial present value of the lease payments equals or exceeds 80 percent of the fair market value of the asset. 
E) The total of the lease payments exceeds $100,000.

Question 20

A capital lease is recorded as an asset on the balance sheet in an amount equal to:

Accepted Answer

A) the dollar amount of each lease payment multiplied by the total number of lease payments in the original agreement. 
B) the dollar amount of each lease payment multiplied by the number of lease payments remaining. 
C) the dollar amount of each lease payment multiplied by the number of lease payments per year. 
D) the lesser of the present value of the remaining lease payments or the cost of the asset. 
E) the future value of the lease agreement at the time the agreement was made. 
A) the dollar amount of each lease payment multiplied by the total number of lease payments in the original agreement. 
B) the dollar amount of each lease payment multiplied by the number of lease payments remaining. 
C) the dollar amount of each lease payment multiplied by the number of lease payments per year. 
D) the lesser of the present value of the remaining lease payments or the cost of the asset. 
E) the future value of the lease agreement at the time the agreement was made.

What are some "good" reasons for opting to lease rather than purchase an asset?

A financial lease in which the lessor is the owner for tax purposes is called a(n)_____ lease.

If a lessor borrows money on a nonrecourse basis to purchase an asset that will be leased to another party,then:

Ron leases a car from Uptown Motors and pays $225 a month as a lease payment.Which one of the following terms applies to Ron?

An operating lease:

Which of the following apply to the lessee of a sale and leaseback arrangement? I.may have option to purchase asset at end of lease term II.receives cash from the sale of the asset III.maintains ownership rights IV.uses the asset

An asset costs $420,000 and will be depreciated in a straight-line manner over its 3-year life.It will have no salvage value.The corporate tax rate is 32 percent,and the cost of borrowing is 8 percent.What lease payment amount will make the lessee and the lessor equally well off?

Which one of the following is most likely the primary reason why a lessee opts to lease an asset on a short-term basis rather than buy that asset?

A financial lease:

A firm borrows money at 8.75 percent,uses straight-line depreciation,and has a 37 percent tax rate.The firm's break-even aftertax annual lease payment on a machine is $16,511.How much will the firm have to pay annually to the lessor to lease this machine?

Which one of the following will classify a lease as a capital lease for accounting purposes?

A capital lease is recorded as an asset on the balance sheet in an amount equal to:

Introduction to Corporate Finance

Financial Statements, Taxes, and Cash Flow

Working With Financial Statements

Long-Term Financial Planning and Growth

Introduction to Valuation: The Time Value of Money

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Stock Valuation

Net Present Value and Other Investment Criteria

Making Capital Investment Decisions

Project Analysis and Evaluation

Some Lessons From Capital Market History

Return, Risk, and the Security Market Line

Cost of Capital

Raising Capital

Financial Leverage and Capital Structure Policy

Dividends and Payout Policy

Short-Term Finance and Planning

Cash and Liquidity Management

Credit and Inventory Management

International Corporate Finance

Behavioral Finance: Implications for Financial Management

Enterprise Risk Management

Options and Corporate Finance

Option Valuation

Mergers and Acquisitions

Filters

Exam 27: Leasing

What are some "good" reasons for opting to lease rather than purchase an asset?

A financial lease in which the lessor is the owner for tax purposes is called a(n)_____ lease.

If a lessor borrows money on a nonrecourse basis to purchase an asset that will be leased to another party,then:

Ron leases a car from Uptown Motors and pays $225 a month as a lease payment.Which one of the following terms applies to Ron?

An operating lease:

Which of the following apply to the lessee of a sale and leaseback arrangement? I.may have option to purchase asset at end of lease term II.receives cash from the sale of the asset III.maintains ownership rights IV.uses the asset

An asset costs $420,000 and will be depreciated in a straight-line manner over its 3-year life.It will have no salvage value.The corporate tax rate is 32 percent,and the cost of borrowing is 8 percent.What lease payment amount will make the lessee and the lessor equally well off?

Which one of the following is most likely the primary reason why a lessee opts to lease an asset on a short-term basis rather than buy that asset?

A financial lease:

A firm borrows money at 8.75 percent,uses straight-line depreciation,and has a 37 percent tax rate.The firm's break-even aftertax annual lease payment on a machine is $16,511.How much will the firm have to pay annually to the lessor to lease this machine?

Which one of the following will classify a lease as a capital lease for accounting purposes?

A capital lease is recorded as an asset on the balance sheet in an amount equal to:

Introduction to Corporate Finance

Financial Statements, Taxes, and Cash Flow

Working With Financial Statements

Long-Term Financial Planning and Growth

Introduction to Valuation: The Time Value of Money

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Stock Valuation

Net Present Value and Other Investment Criteria

Making Capital Investment Decisions

Project Analysis and Evaluation

Some Lessons From Capital Market History

Return, Risk, and the Security Market Line

Cost of Capital

Raising Capital

Financial Leverage and Capital Structure Policy

Dividends and Payout Policy

Short-Term Finance and Planning

Cash and Liquidity Management

Credit and Inventory Management

International Corporate Finance

Behavioral Finance: Implications for Financial Management

Enterprise Risk Management

Options and Corporate Finance

Option Valuation

Mergers and Acquisitions

Filters