Question 1

A firm that is very cyclical in nature and requires extra equipment only during its peak periods should consider leasing that equipment using a(n)_____ lease.

Accepted Answer

A) operating 
B) tax-oriented 
C) sale and buyback 
D) leveraged 
E) financial 
A) operating 
B) tax-oriented 
C) sale and buyback 
D) leveraged 
E) financial

Question 2

Which one of the following statements is correct concerning taxes and leasing?

Accepted Answer

A) Tax-deferral is a legitimate reason for leasing. 
B) The lessee should be the party with the higher tax bracket. 
C) Generally speaking, lessors tend to benefit from leases while lessees do not. 
D) If a firm has significant net operating losses, it should be the lessor in a lease. 
E) You should only lease an asset if the lease will be fully amortized. 
A) Tax-deferral is a legitimate reason for leasing. 
B) The lessee should be the party with the higher tax bracket. 
C) Generally speaking, lessors tend to benefit from leases while lessees do not. 
D) If a firm has significant net operating losses, it should be the lessor in a lease. 
E) You should only lease an asset if the lease will be fully amortized.

Question 3

Fred's Garage is trying to decide whether to lease or buy some new equipment.The equipment costs $48,000 and has a 6-year life.The equipment will be worthless after the 6 years and will have to be replaced.The company has a tax rate of 34 percent,a cost of borrowed funds of 7.5 percent,and uses straight-line depreciation.The equipment can be leased for $10,600 a year.What is the amount of the aftertax lease payment?

Accepted Answer

A) $3,286.00 
B) $6,996.00 
C) $7,862.55 
D) $8,406.16 
E) $10,928.60 
A) $3,286.00 
B) $6,996.00 
C) $7,862.55 
D) $8,406.16 
E) $10,928.60

Question 4

Deep Mining,Inc.,is contemplating the acquisition of some new equipment for controlling coal dust that costs $174,000.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.After that time,the equipment will be worthless.The equipment can be leased for $53,100 a year for 4 years.The firm can borrow money at 11.5 percent and has a 36 percent tax rate.What is the net advantage to leasing?

Accepted Answer

A) $5,225 
B) $5,607 
C) $6,611 
D) $6,847 
E) $6,950 
A) $5,225 
B) $5,607 
C) $6,611 
D) $6,847 
E) $6,950

Question 5

A firm can either lease or buy some new equipment.The lease payments would be $18,500 a year for 4 years.The purchase price is $72,900.The equipment has a 4-year life after which it is expected to have a resale value of $3,600.The firm uses straight-line depreciation over the life of the asset,borrows money at 11 percent,and has a 35 percent tax rate.The company does not expect to owe any taxes for at least 4 years because it has accumulated net operating losses.What is the incremental cash flow for year 3 if the company decides to lease rather than purchase the equipment?

Accepted Answer

A) -$29,165 
B) -$21,821 
C) -$18,500 
D) -$18,559 
E) -$17,635 
A) -$29,165 
B) -$21,821 
C) -$18,500 
D) -$18,559 
E) -$17,635

Question 6

Morrison Industrial Tool can either lease or buy some equipment.The lease payments would be $12,400 a year.The purchase price is $34,900.The equipment has a 3-year life after which it is expected to have a resale value of $5,500.The firm uses straight-line depreciation over the asset's life,borrows money at 8 percent,and has a 34 percent tax rate.What is the incremental cash flow for year 1 if the company decides to lease the equipment rather than purchase it?

Accepted Answer

A) -$22,405 
B) -$16,805 
C) -$12,139 
D) -$8,184 
E) -$4,905 
A) -$22,405 
B) -$16,805 
C) -$12,139 
D) -$8,184 
E) -$4,905

Question 7

The most cited reason why firms enter into lease agreements is to:

Accepted Answer

A) lower taxes. 
B) improve cash flows. 
C) reduce uncertainty. 
D) avoid balance sheet reporting. 
E) bypass restrictive loan covenants. 
A) lower taxes. 
B) improve cash flows. 
C) reduce uncertainty. 
D) avoid balance sheet reporting. 
E) bypass restrictive loan covenants.

Question 8

You are comparing a lease to a purchase.The NPV associated with this analysis is referred to as the:

Accepted Answer

A) open interest net present value. 
B) depreciated net present value. 
C) net advantage to leasing. 
D) profitability index. 
E) net value of purchasing. 
A) open interest net present value. 
B) depreciated net present value. 
C) net advantage to leasing. 
D) profitability index. 
E) net value of purchasing.

Question 9

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 $3 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.You can lease it for $750,000 per year for 4 years.Assume the tax rate is 31 percent.You can borrow at 8 percent before taxes.Your company does not expect to pay taxes for the next several years,but the leasing company will pay taxes.What range of lease payments will allow the lease to be profitable for both parties?

Accepted Answer

A) $904,026 to $905,123 
B) $904,026 to $905,481 
C) $904,026 to $905,762 
D) $905,123 to $906,417 
E) $905,123 to $906,825 
A) $904,026 to $905,123 
B) $904,026 to $905,481 
C) $904,026 to $905,762 
D) $905,123 to $906,417 
E) $905,123 to $906,825

Question 10

Fargo North is considering the purchase of some new equipment costing $118,000.This equipment has a 5-year life after which it will be worthless.The firm uses straight-line depreciation and borrows funds at 9 percent interest.The company's tax rate is 33 percent.The firm also has the option of leasing the equipment.What is the amount of the break-even lease payment?

Accepted Answer

A) $30,220 
B) $31,467 
C) $31,775 
D) $33,719 
E) $34,897 
A) $30,220 
B) $31,467 
C) $31,775 
D) $33,719 
E) $34,897

Question 11

Jane's Floor Care is contemplating the acquisition of some new equipment for refinishing wood floors.The purchase price is $74,000.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 equipment can be leased for $24,600 a year.The firm can borrow money at 9.5 percent and has a 34 percent tax rate.What is the amount of the depreciation tax shield in year 4?

Accepted Answer

A) $1,758.09 
B) $1,864.36 
C) $1,940.80 
D) $2,011.67 
E) $2,221.08 
A) $1,758.09 
B) $1,864.36 
C) $1,940.80 
D) $2,011.67 
E) $2,221.08

Question 12

Frozen Foods Delivery is considering the purchase of a delivery truck costing $49,000.The truck can be leased for 3 years at $19,500 per year or it can be purchased at an interest rate of 7.5 percent.The estimated life of the truck is 3 years.The corporate tax rate is 34 percent.The company does not expect to owe any taxes for the next several years due to accumulated net operating losses.The firm uses straight-line depreciation.What is the net advantage to leasing?

Accepted Answer

A) -$1,710 
B) -$866 
C) $304 
D) $1,006 
E) $1,394 
A) -$1,710 
B) -$866 
C) $304 
D) $1,006 
E) $1,394

Question 13

Green Valley Farms is considering either leasing or buying some new farm equipment.The lessor will charge $27,500 a year for a 5-year lease.The purchase price is $136,000.The equipment has a 5-year life after which time it will be worthless.Green Valley Farms uses straight-line depreciation,has a 32 percent tax rate,borrows money at 10 percent,and has sufficient tax loss carryovers to offset any potential taxable income the firm might have over the next five years.What is the net advantage to leasing?

Accepted Answer

A) $20,574 
B) $21,507 
C) $22,638 
D) $26,283 
E) $31,753 
A) $20,574 
B) $21,507 
C) $22,638 
D) $26,283 
E) $31,753

Question 14

An operating lease has which of the following characteristics?
I.lessee has responsibility for the maintenance and insurance
II.lease payments cover the full cost of the asset
III.economic life of the asset exceeds the lease term
IV.lessee can cancel the lease prior to the expiration date

Accepted Answer

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

Question 15

Frank's Auto Repair can purchase a new machine for $136,000.The machine has a 4-year life and can be sold at the end of year 4 for $12,000.Frank's 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 equipment can be leased for $35,900 a year.The firm can borrow money at 7.5 percent and has a 32 percent tax rate.The company does not expect to owe any taxes for at least the next 4 years due to net operating losses.What is the incremental annual cash flow for year 4 if the company decides to lease rather than purchase the equipment?

Accepted Answer

A) -$47,900 
B) -$35,900 
C) -$20,900 
D) $15,900 
E) $35,900 
A) -$47,900 
B) -$35,900 
C) -$20,900 
D) $15,900 
E) $35,900

Question 16

Bob's Pizza is considering either leasing or buying a new oven.The lease payments would be $10,200 a year for 3 years.The purchase price is $29,000.The equipment has a 3-year life and then is expected to have a resale value of $3,100.Bob's Pizza uses straight-line depreciation,borrows money at 10 percent,and has a 32 percent tax rate.What is the net advantage to leasing?

Accepted Answer

A) $809 
B) $833 
C) $848 
D) $853 
E) $898 
A) $809 
B) $833 
C) $848 
D) $853 
E) $898

Question 17

If a firm enters a sale and leaseback agreement,then:
I.the lessee will benefit from an immediate cash inflow.
II.both the lessor and the lessee may benefit if the lessor can benefit more from the tax benefits of ownership than can the lessee.
III.the lease automatically becomes a nonrecourse lease.
IV.the lessee forfeits the right to repurchase the asset at a later date.

Accepted Answer

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

Question 18

Steven's Auto Detailers is trying to decide whether to lease or buy some new equipment for polishing vehicles.The equipment costs $22,000,has a 3-year life,and will be worthless after the 3 years.The aftertax discount rate is 6.2 percent.The annual depreciation tax shield is $1,760 and the aftertax annual lease payment is $6,800.What is the net advantage to leasing?

Accepted Answer

A) -$796.58 
B) -$397.11 
C) $184.92 
D) $315.40 
E) $462.84 
A) -$796.58 
B) -$397.11 
C) $184.92 
D) $315.40 
E) $462.84

Question 19

Williams' Paints is weighing a lease versus a purchase of some new machinery.The purchase price is $312,000.The equipment will be depreciated to zero over the 4-year life of the project after which time it is expected to have a resale value of $76,000.The firm uses straight-line depreciation and can borrow money at 8 percent.The equipment can be leased for $66,000 a year for 4 years.Williams' Paints does not expect to owe any taxes for the next 4 years because of its net operating losses.What is the net advantage to leasing?

Accepted Answer

A) $9,846 
B) $11,900 
C) $24,924 
D) $28,207 
E) $37,537 
A) $9,846 
B) $11,900 
C) $24,924 
D) $28,207 
E) $37,537

Question 20

Explain the "leasing paradox" and also explain why leasing is or is not a "zero sum game".

Accepted Answer

The leasing paradox is that,given identi

A firm that is very cyclical in nature and requires extra equipment only during its peak periods should consider leasing that equipment using a(n)_____ lease.

Which one of the following statements is correct concerning taxes and leasing?

The most cited reason why firms enter into lease agreements is to:

You are comparing a lease to a purchase.The NPV associated with this analysis is referred to as the:

An operating lease has which of the following characteristics? I.lessee has responsibility for the maintenance and insurance II.lease payments cover the full cost of the asset III.economic life of the asset exceeds the lease term IV.lessee can cancel the lease prior to the expiration date

Explain the "leasing paradox" and also explain why leasing is or is not a "zero sum game".

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

A firm that is very cyclical in nature and requires extra equipment only during its peak periods should consider leasing that equipment using a(n)_____ lease.

Which one of the following statements is correct concerning taxes and leasing?

The most cited reason why firms enter into lease agreements is to:

You are comparing a lease to a purchase.The NPV associated with this analysis is referred to as the:

An operating lease has which of the following characteristics? I.lessee has responsibility for the maintenance and insurance II.lease payments cover the full cost of the asset III.economic life of the asset exceeds the lease term IV.lessee can cancel the lease prior to the expiration date

Explain the "leasing paradox" and also explain why leasing is or is not a "zero sum game".

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