Question 1

Which of the following statements regarding operating leases is FALSE?

Accepted Answer

A) They are also called finance leases. 
B) The lease is viewed as a rental for accounting purposes. 
C) The lessee reports the entire lease payment as an operating expense. 
D) They are disclosed in the footnotes of the lessee's financial statements. 
A) They are also called finance leases. 
B) The lease is viewed as a rental for accounting purposes. 
C) The lessee reports the entire lease payment as an operating expense. 
D) They are disclosed in the footnotes of the lessee's financial statements. A

Question 2

What will Luther's balance sheet look like if they acquire the new fleet of delivery trucks using a capital lease?

Accepted Answer

If the firm acquires the fleet through a capital lease,it is the same as if Luther borrowed the money and purchased the fleet directly.The fleet is must be listed as an asset and the lease will show up as a liability.Therefore,Luther's balance sheet will look like:

Question 3

The lease is treated as a capital lease (financial lease)for the lessee and must be listed on the firm's balance sheet if it satisfies any of the following conditions EXCEPT:

Accepted Answer

A) the lease contains an option to purchase the asset at its fair market value. 
B) the present value of the minimum lease payments at the start of the lease is 90% or more of the asset's fair market value. 
C) the title to the property transfers to the lessee at the end of the lease term. 
D) the lease term is 75% or more of the estimated economic life of the asset. 
A) the lease contains an option to purchase the asset at its fair market value. 
B) the present value of the minimum lease payments at the start of the lease is 90% or more of the asset's fair market value. 
C) the title to the property transfers to the lessee at the end of the lease term. 
D) the lease term is 75% or more of the estimated economic life of the asset. A

Question 4

Which of the following statements is FALSE?

Accepted Answer

A) Absent market imperfections,leases represent another form of zero-NPV financing available to a firm,and the Modigliani-Miller propositions apply: Leases neither increase nor decrease firm value,but serve only to divide the firm's cash flows and risks in different ways. 
B) In a perfect market,the cost of leasing is equivalent to the cost of purchasing and reselling the asset. 
C) Each lease agreement can be tailored to fit the precise nature of the asset and the needs of the parties at hand. 
D) Features of leases will be priced as part of the lease payment.Terms that give valuable options to the lessee lower the amount of the lease payments,whereas terms that restrict these options will raise them. 
A) Absent market imperfections,leases represent another form of zero-NPV financing available to a firm,and the Modigliani-Miller propositions apply: Leases neither increase nor decrease firm value,but serve only to divide the firm's cash flows and risks in different ways. 
B) In a perfect market,the cost of leasing is equivalent to the cost of purchasing and reselling the asset. 
C) Each lease agreement can be tailored to fit the precise nature of the asset and the needs of the parties at hand. 
D) Features of leases will be priced as part of the lease payment.Terms that give valuable options to the lessee lower the amount of the lease payments,whereas terms that restrict these options will raise them.

Question 5

Which of the following statements is FALSE?

Accepted Answer

A) Most financial analysts and sophisticated investors consider operating leases (which must be listed in the footnotes of the financial statements)to be additional sources of leverage. 
B) By carefully avoiding the four criteria that define a operating lease for accounting purposes,a firm can avoid listing the long-term lease as a liability. 
C) Because a lease is equivalent to a loan,the firm can increase its actual leverage without increasing the debt-to-equity ratio on its balance sheet. 
D) For most large corporations,the amount of leverage the firm can obtain through a lease is unlikely to exceed the amount of leverage the firm can obtain through a loan. 
A) Most financial analysts and sophisticated investors consider operating leases (which must be listed in the footnotes of the financial statements)to be additional sources of leverage. 
B) By carefully avoiding the four criteria that define a operating lease for accounting purposes,a firm can avoid listing the long-term lease as a liability. 
C) Because a lease is equivalent to a loan,the firm can increase its actual leverage without increasing the debt-to-equity ratio on its balance sheet. 
D) For most large corporations,the amount of leverage the firm can obtain through a lease is unlikely to exceed the amount of leverage the firm can obtain through a loan.

Question 6

Is St.Martin's better off leasing the CT scanner or financing the purchase of the CT scanner with a lease-equivalent loan and by how much is St Martin's better off?

Accepted Answer

First we construct the FCF from leasing

Question 7

Which of the following statements is FALSE?

Accepted Answer

A) Leases may include early cancellation options that allow the lessee to end the lease early (perhaps for a fee). 
B) The cost of the lease will depend on the asset's residual value,which is its book value at the end of the lease. 
C) Leases may allow the lessee to trade in and upgrade the equipment to a newer model at certain points in the lease. 
D) Leases may contain buyout options that allow the lessee to purchase the asset before the end of the lease term. 
A) Leases may include early cancellation options that allow the lessee to end the lease early (perhaps for a fee). 
B) The cost of the lease will depend on the asset's residual value,which is its book value at the end of the lease. 
C) Leases may allow the lessee to trade in and upgrade the equipment to a newer model at certain points in the lease. 
D) Leases may contain buyout options that allow the lessee to purchase the asset before the end of the lease term.

Question 8

A lease where the lessee can purchase the asset at the minimum of its fair market value and a fixed price is called a:

Accepted Answer

A) $1.00 out lease. 
B) fixed price lease. 
C) fair market value lease. 
D) fair market value cap lease. 
A) $1.00 out lease. 
B) fixed price lease. 
C) fair market value lease. 
D) fair market value cap lease.

Question 9

Use the following information to answer the question(s)below.
Rearden Metal is considering the purchase of a new blast furnace costing a total of $5 million dollars.This furnace will qualify for accelerated depreciation: 20% can be expense immediately,followed by 32%,19.2%,11.52%,11.52% and 5.76% over the next five years.However,because of Rearden's substantial tax loss carry forwards,Rearden estimates its marginal tax rate to be only 10% over the next five years.Since Rearden will get very little tax benefit from the depreciation expense,they consider leasing the furnace instead.Suppose that Rearden and the lessor face the same 8% borrowing rate,but the lessor has a 40% marginal tax rate.Assume that the furnace is worthless after five years,the lease term is five years,and a lease would qualify as a true tax lease.
-Assuming that Rearden's annual lease payments are $1.1 million,then the effective after-tax lease borrowing rate is closest to:

Accepted Answer

A) 8.0% 
B) 12.8% 
C) 15.4% 
D) 17.0% 
A) 8.0% 
B) 12.8% 
C) 15.4% 
D) 17.0%

Question 10

Which of the following statements is FALSE?

Accepted Answer

A) Leasing allows the party best able to bear the risk to hold it.For example,small firms with a low tolerance for risk may prefer to lease rather than purchase assets. 
B) When the lessor is the manufacturer,a lease in which the lessor bears the risk of the residual value can improve incentives and lower agency costs. 
C) For leases in which the lessor retains a substantial interest in the asset's residual value,the lessee has more of an incentive to take proper care of an asset that is leased rather than purchased. 
D) Whether they appear on the balance sheet or not,lease commitments are a liability for the firm. 
A) Leasing allows the party best able to bear the risk to hold it.For example,small firms with a low tolerance for risk may prefer to lease rather than purchase assets. 
B) When the lessor is the manufacturer,a lease in which the lessor bears the risk of the residual value can improve incentives and lower agency costs. 
C) For leases in which the lessor retains a substantial interest in the asset's residual value,the lessee has more of an incentive to take proper care of an asset that is leased rather than purchased. 
D) Whether they appear on the balance sheet or not,lease commitments are a liability for the firm.

Question 11

Assuming that Rearden's annual lease payments are $1.1 million,then the amount of the lease-equivalent loan is closest to:

Accepted Answer

A) $3.7 million. 
B) $3.8 million. 
C) $3.9 million. 
D) $4.0 million. 
A) $3.7 million. 
B) $3.8 million. 
C) $3.9 million. 
D) $4.0 million.

Question 12

Which of the following statements is FALSE?

Accepted Answer

A) By offering assets together with complementary services,lessors can achieve efficiency gains and offer attractive lease rates. 
B) Assets leased under a true lease are afforded bankruptcy protection and cannot be seized in the event of default. 
C) Because of the higher recovery value in the event of default,a lessor may be able to offer more attractive financing through the lease than an ordinary lender could. 
D) Lessors often have efficiency advantages over lessees in maintaining or operating certain types of assets. 
A) By offering assets together with complementary services,lessors can achieve efficiency gains and offer attractive lease rates. 
B) Assets leased under a true lease are afforded bankruptcy protection and cannot be seized in the event of default. 
C) Because of the higher recovery value in the event of default,a lessor may be able to offer more attractive financing through the lease than an ordinary lender could. 
D) Lessors often have efficiency advantages over lessees in maintaining or operating certain types of assets.

Question 13

Which of the following statements is FALSE?

Accepted Answer

A) We can compare leasing to buying the asset using equivalent leverage by discounting the incremental cash flows of leasing versus buying using the after-tax borrowing rate. 
B) A non-tax lease is attractive if it offers a better interest rate than would be available with a loan. 
C) Evaluating a true tax lease is much more straightforward than evaluating a non-tax lease. 
D) To determine whether a non-tax lease offers a better rate,we discount the lease payments at the firm's pre-tax borrowing rate and compare it to the purchase price of the asset. 
A) We can compare leasing to buying the asset using equivalent leverage by discounting the incremental cash flows of leasing versus buying using the after-tax borrowing rate. 
B) A non-tax lease is attractive if it offers a better interest rate than would be available with a loan. 
C) Evaluating a true tax lease is much more straightforward than evaluating a non-tax lease. 
D) To determine whether a non-tax lease offers a better rate,we discount the lease payments at the firm's pre-tax borrowing rate and compare it to the purchase price of the asset.

Question 14

Assuming that Rearden's annual lease payments are $1.2 million,and using the direct method,the NPV of leasing is closest to:

Accepted Answer

A) ($165,000) 
B) ($95,000) 
C) $0 
D) $95,000 
A) ($165,000) 
B) ($95,000) 
C) $0 
D) $95,000

Question 15

Which of the following statements is FALSE?

Accepted Answer

A) Because we are getting the entire asset when we purchase it with the loan,the loan payments are higher than the lease payments. 
B) In a perfect market,the cost of leasing and then purchasing the asset is equivalent to the cost of borrowing to purchase the asset. 
C) With a lease we are financing the entire cost of the asset,with a standard loan we are financing only the cost of the economic depreciation of the asset during its life. 
D) The amount of the lease payment will depend on the purchase price,the residual value,and the appropriate discount rate for the cash flows. 
A) Because we are getting the entire asset when we purchase it with the loan,the loan payments are higher than the lease payments. 
B) In a perfect market,the cost of leasing and then purchasing the asset is equivalent to the cost of borrowing to purchase the asset. 
C) With a lease we are financing the entire cost of the asset,with a standard loan we are financing only the cost of the economic depreciation of the asset during its life. 
D) The amount of the lease payment will depend on the purchase price,the residual value,and the appropriate discount rate for the cash flows.

Question 16

Which of the following statements is FALSE?

Accepted Answer

A) A lease is a contract between two parties: the lessee and the lessor. 
B) Most leases involve little or no upfront payment. 
C) The lessee is the owner of the asset,who is entitled to the lease payments in exchange for lending the asset. 
D) At the end of the contract term,the lease specifies who will retain ownership of the asset and at what terms. 
A) A lease is a contract between two parties: the lessee and the lessor. 
B) Most leases involve little or no upfront payment. 
C) The lessee is the owner of the asset,who is entitled to the lease payments in exchange for lending the asset. 
D) At the end of the contract term,the lease specifies who will retain ownership of the asset and at what terms.

Question 17

Use the following information to answer the question(s)below.
Rearden Metal is considering the purchase of a new blast furnace costing a total of $5 million dollars.This furnace will qualify for accelerated depreciation: 20% can be expense immediately,followed by 32%,19.2%,11.52%,11.52% and 5.76% over the next five years.However,because of Rearden's substantial tax loss carry forwards,Rearden estimates its marginal tax rate to be only 10% over the next five years.Since Rearden will get very little tax benefit from the depreciation expense,they consider leasing the furnace instead.Suppose that Rearden and the lessor face the same 8% borrowing rate,but the lessor has a 40% marginal tax rate.Assume that the furnace is worthless after five years,the lease term is five years,and a lease would qualify as a true tax lease.
-The lease rate for which the lessor will break even is closest to:

Accepted Answer

A) $1,110,000 
B) $1,130,000 
C) $1,150,000 
D) $1,160,000 
A) $1,110,000 
B) $1,130,000 
C) $1,150,000 
D) $1,160,000

Question 18

Which of the following statements is FALSE?

Accepted Answer

A) Lease payments are a fixed obligation of the firm. 
B) The risk of the lease payments is no greater than the risk of secured debt,so it is reasonable to discount the lease payments at the firm's secured borrowing rate. 
C) If a firm purchases a piece of equipment,the expense is a capital expenditure.Therefore,the purchase price can be depreciated over time,generating a depreciation tax shield. 
D) If the equipment is leased and the lease is a non-tax lease,there is no capital expenditure,but the lease payments are an operating expense. 
A) Lease payments are a fixed obligation of the firm. 
B) The risk of the lease payments is no greater than the risk of secured debt,so it is reasonable to discount the lease payments at the firm's secured borrowing rate. 
C) If a firm purchases a piece of equipment,the expense is a capital expenditure.Therefore,the purchase price can be depreciated over time,generating a depreciation tax shield. 
D) If the equipment is leased and the lease is a non-tax lease,there is no capital expenditure,but the lease payments are an operating expense.

Question 19

Assuming that Rearden's annual lease payments are $1.2 million,then the effective after-tax lease borrowing rate is closest to:

Accepted Answer

A) 7.2% 
B) 8.0% 
C) 8.8% 
D) 9.1% 
A) 7.2% 
B) 8.0% 
C) 8.8% 
D) 9.1%

Question 20

If Luther acquires the new fleet of delivery trucks using an operating lease,Luther's Debt to Equity ratio will be closest to:

Accepted Answer

A) 2.0 
B) 1.5 
C) 0.80 
D) 0.66 
A) 2.0 
B) 1.5 
C) 0.80 
D) 0.66

Exam 25: Leasing

Which of the following statements regarding operating leases is FALSE?

What will Luther's balance sheet look like if they acquire the new fleet of delivery trucks using a capital lease?

The lease is treated as a capital lease (financial lease)for the lessee and must be listed on the firm's balance sheet if it satisfies any of the following conditions EXCEPT:

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Is St.Martin's better off leasing the CT scanner or financing the purchase of the CT scanner with a lease-equivalent loan and by how much is St Martin's better off?

Which of the following statements is FALSE?

A lease where the lessee can purchase the asset at the minimum of its fair market value and a fixed price is called a:

Which of the following statements is FALSE?

Assuming that Rearden's annual lease payments are $1.1 million,then the amount of the lease-equivalent loan is closest to:

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Assuming that Rearden's annual lease payments are $1.2 million,and using the direct method,the NPV of leasing is closest to:

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Assuming that Rearden's annual lease payments are $1.2 million,then the effective after-tax lease borrowing rate is closest to:

If Luther acquires the new fleet of delivery trucks using an operating lease,Luther's Debt to Equity ratio will be closest to:

The Corporation

Introduction to Financial Statement Analysis

Financial Decision Making and the Law of One Price

The Time Value of Money

Interest Rates

Valuing Bonds

Investment Decision Rules

Fundamentals of Capital Budgeting

Valuing Stocks

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behavior and Capital Market Efficiency

Capital Structure in a Perfect Market

Debt and Taxes

Financial Distress,managerial Incentives,and Information

Payout Policy

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modeling: a Case Study

Financial Options

Option Valuation

Real Options

Raising Equity Capital

Debt Financing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

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