Question 1

Which of the following statements is FALSE?

Accepted Answer

A) The decision to lease is often driven by real-world market imperfections related to leasing's accounting,tax,and legal treatment. 
B) When publicly traded firms disclose leasing transactions in their financial statements,they must follow the recommendations of the Financial Accounting Standards Board (FAS
B) . 
C) In its Statement of Financial Accounting Standards No.13 (FAS13),the FASB provides specific criteria that distinguish a true tax lease from a non-tax lease. 
D) The categories used to report leases on the financial statements affect the values of assets on the balance sheet,but they have no direct effect on the cash flows that result from a leasing transaction. 
A) The decision to lease is often driven by real-world market imperfections related to leasing's accounting,tax,and legal treatment. 
B) When publicly traded firms disclose leasing transactions in their financial statements,they must follow the recommendations of the Financial Accounting Standards Board (FAS
B) . 
C) In its Statement of Financial Accounting Standards No.13 (FAS13),the FASB provides specific criteria that distinguish a true tax lease from a non-tax lease. 
D) The categories used to report leases on the financial statements affect the values of assets on the balance sheet,but they have no direct effect on the cash flows that result from a leasing transaction.

Question 2

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 Rearden Metal should

Accepted Answer

A) lease the furnace since the amount saved in year zero from leasing is greater than the amount of the lease equivalent loan. 
B) buy the furnace since the amount saved in year zero from leasing is greater than the amount of the lease equivalent loan. 
C) lease the furnace since the amount saved in year zero from leasing is less than the amount of the lease equivalent loan. 
D) buy the furnace since the amount saved in year zero from leasing is less than the amount of the lease equivalent loan. 
A) lease the furnace since the amount saved in year zero from leasing is greater than the amount of the lease equivalent loan. 
B) buy the furnace since the amount saved in year zero from leasing is greater than the amount of the lease equivalent loan. 
C) lease the furnace since the amount saved in year zero from leasing is less than the amount of the lease equivalent loan. 
D) buy the furnace since the amount saved in year zero from leasing is less than the amount of the lease equivalent loan.

Question 3

Which of the following statements is FALSE?

Accepted Answer

A) For a lease to be attractive to both the lessee and the lessor,the gains must come from some underlying economic benefits that the leasing arrangement provides. 
B) With a true tax lease,the lessor replaces depreciation and interest tax deductions with a deduction for the lease payments. 
C) Generally speaking,if the asset's tax depreciation deductions are more rapid than its lease payments,a true tax lease is advantageous if the lessor is in a higher tax bracket than the lessee. 
D) A tax gain occurs if the lease shifts the more valuable deductions to the party with the higher tax rate. 
A) For a lease to be attractive to both the lessee and the lessor,the gains must come from some underlying economic benefits that the leasing arrangement provides. 
B) With a true tax lease,the lessor replaces depreciation and interest tax deductions with a deduction for the lease payments. 
C) Generally speaking,if the asset's tax depreciation deductions are more rapid than its lease payments,a true tax lease is advantageous if the lessor is in a higher tax bracket than the lessee. 
D) A tax gain occurs if the lease shifts the more valuable deductions to the party with the higher tax rate.

Question 4

Use the information for the question(s)below.
Suppose the purchase price of a bulldozer is $90,000,its residual value in four years is certain to be $15,000,and there is no risk that the lessee will default on the lease.Assume that capital markets are perfect and the risk-free interest rate is 6% APR with monthly compounding.
-The monthly lease payments for a four year lease of the bulldozer are closest to:

Accepted Answer

A) $1870 
B) $1825 
C) $1750 
D) $2115 
A) $1870 
B) $1825 
C) $1750 
D) $2115

Question 5

Which of the following statements regarding leases and bankruptcy is FALSE?

Accepted Answer

A) Operating and true tax leases are generally viewed as true leases by the courts,whereas capital and non-tax leases are more likely to be viewed as a security interest. 
B) By retaining ownership of the asset,the lessor has the right to repossess it if the lease payments are not made,even if the firm seeks bankruptcy protection. 
C) If a lease contract is characterized as a true lease in bankruptcy,the lessor is in a somewhat superior position than a lender if the firm defaults. 
D) If the lease is classified as a true lease in bankruptcy,then the lessee retains ownership rights over the asset. 
A) Operating and true tax leases are generally viewed as true leases by the courts,whereas capital and non-tax leases are more likely to be viewed as a security interest. 
B) By retaining ownership of the asset,the lessor has the right to repossess it if the lease payments are not made,even if the firm seeks bankruptcy protection. 
C) If a lease contract is characterized as a true lease in bankruptcy,the lessor is in a somewhat superior position than a lender if the firm defaults. 
D) If the lease is classified as a true lease in bankruptcy,then the lessee retains ownership rights over the asset.

Question 6

Which of the following statements regarding leases and taxes is FALSE?

Accepted Answer

A) In a non-tax lease,the lessee can deduct the interest portion of the lease payments as an interest expense. 
B) In a true tax lease,the lease payments are treated as revenue for the lessor. 
C) In a true tax lease,the lessee receives the depreciation deductions associated with the ownership of the asset. 
D) The IRS separates leases into two broad categories: true tax leases and non-tax leases. 
A) In a non-tax lease,the lessee can deduct the interest portion of the lease payments as an interest expense. 
B) In a true tax lease,the lease payments are treated as revenue for the lessor. 
C) In a true tax lease,the lessee receives the depreciation deductions associated with the ownership of the asset. 
D) The IRS separates leases into two broad categories: true tax leases and non-tax leases.

Question 7

A lease that gives the lessee the option to purchase the asset at its fair market value at the termination of the lease is called a:

Accepted Answer

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

Question 8

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

Accepted Answer

If the firm acquires the fleet through a

Question 9

Assuming that Rearden's annual lease payments are $1.2 million,then the amount of the lease-equivalent loan is closest to:

Accepted Answer

A) $3.8 million 
B) $3.9 million 
C) $4.0 million 
D) $4.2 million 
A) $3.8 million 
B) $3.9 million 
C) $4.0 million 
D) $4.2 million

Question 10

Suppose that instead of leasing the bulldozer,the company is considering purchasing a bulldozer outright by borrowing the purchase price using a four-year annuity loan.The monthly loan payments for a four year loan to purchase the bulldozer are closest to:

Accepted Answer

A) $2115 
B) $1825 
C) $1870 
D) $1750 
A) $2115 
B) $1825 
C) $1870 
D) $1750

Question 11

Which of the following statements regarding capital leases is FALSE?

Accepted Answer

A) Because capital leases increase the apparent leverage on the firm's balance sheet,firms sometimes prefer to have a lease categorized as an operating lease to keep it off the balance sheet. 
B) The firm does not report the present value of the future lease payments as a liability on the balance sheet. 
C) The asset acquired is listed on the lessee's balance sheet,and the lessee incurs depreciation expenses for the asset. 
D) They are viewed as an acquisition for accounting purposes. 
A) Because capital leases increase the apparent leverage on the firm's balance sheet,firms sometimes prefer to have a lease categorized as an operating lease to keep it off the balance sheet. 
B) The firm does not report the present value of the future lease payments as a liability on the balance sheet. 
C) The asset acquired is listed on the lessee's balance sheet,and the lessee incurs depreciation expenses for the asset. 
D) They are viewed as an acquisition for accounting purposes.

Question 12

Assuming that Rearden's annual lease payments are $1.2 million,then Rearden Metal should:

Accepted Answer

A) lease the furnace since the amount saved in year zero from leasing is greater than the amount of the lease equivalent loan. 
B) buy the furnace since the amount saved in year zero from leasing is greater than the amount of the lease equivalent loan. 
C) lease the furnace since the amount saved in year zero from leasing is less than the amount of the lease equivalent loan. 
D) buy the furnace since the amount saved in year zero from leasing is less than the amount of the lease equivalent loan. 
A) lease the furnace since the amount saved in year zero from leasing is greater than the amount of the lease equivalent loan. 
B) buy the furnace since the amount saved in year zero from leasing is greater than the amount of the lease equivalent loan. 
C) lease the furnace since the amount saved in year zero from leasing is less than the amount of the lease equivalent loan. 
D) buy the furnace since the amount saved in year zero from leasing is less than the amount of the lease equivalent loan.

Question 13

A lease will be treated as a non-tax lease if it satisfies any of the following conditions EXCEPT:

Accepted Answer

A) the property may be acquired at the fair market value of the asset at the time when the option may be exercised. 
B) some portion of the lease payments is specifically designated as interest or its equivalent. 
C) the lessee receives ownership of the asset on completion of all lease payments. 
D) the total amount that the lessee is required to pay for a relatively short period of use constitutes an inordinately large proportion of the total value of the asset. 
A) the property may be acquired at the fair market value of the asset at the time when the option may be exercised. 
B) some portion of the lease payments is specifically designated as interest or its equivalent. 
C) the lessee receives ownership of the asset on completion of all lease payments. 
D) the total amount that the lessee is required to pay for a relatively short period of use constitutes an inordinately large proportion of the total value of the asset.

Question 14

Use the table for the question(s)below.
Luther Industries currently has the following balance sheet (in thousands of dollars):   Luther is about to add a new fleet of delivery trucks.The price of the fleet is $1.5 million.
-If Luther acquires the new fleet of delivery trucks using a capital lease,Luther's Debt to Equity ratio will be closest to:

Accepted Answer

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

Question 15

Which of the following statements is FALSE?

Accepted Answer

A) If a firm only needs to use the asset for a short time,it is probably less costly to lease it than to buy and resell the asset. 
B) While owners of assets are likely to resell them only if the assets are "lemons," a short-term lease can commit the user of an asset to return it regardless of its quality.In this way,leases can help mitigate the adverse selection problem in the used goods market. 
C) Car dealerships are in a better position to sell a used car at the end of a lease than a consumer is. 
D) If the asset's tax depreciation deductions are faster than its lease payments,there are tax gains from a true tax lease if the lessor is in a lower tax bracket than the lessee. 
A) If a firm only needs to use the asset for a short time,it is probably less costly to lease it than to buy and resell the asset. 
B) While owners of assets are likely to resell them only if the assets are "lemons," a short-term lease can commit the user of an asset to return it regardless of its quality.In this way,leases can help mitigate the adverse selection problem in the used goods market. 
C) Car dealerships are in a better position to sell a used car at the end of a lease than a consumer is. 
D) If the asset's tax depreciation deductions are faster than its lease payments,there are tax gains from a true tax lease if the lessor is in a lower tax bracket than the lessee.

Question 16

Which of the following statements is FALSE?

Accepted Answer

A) The lease-equivalent loan is the loan that is required on the purchase of the asset that leaves the purchaser with the same obligations as the lessor would have. 
B) Lease obligations themselves could trigger financial distress. 
C) When a firm enters into a lease,it is committing to lease payments that are a fixed future obligation of the firm. 
D) When a firm leases an asset,it is effectively adding leverage to its capital structure (whether or not the lease appears on the balance sheet for accounting purposes). 
A) The lease-equivalent loan is the loan that is required on the purchase of the asset that leaves the purchaser with the same obligations as the lessor would have. 
B) Lease obligations themselves could trigger financial distress. 
C) When a firm enters into a lease,it is committing to lease payments that are a fixed future obligation of the firm. 
D) When a firm leases an asset,it is effectively adding leverage to its capital structure (whether or not the lease appears on the balance sheet for accounting purposes).

Question 17

Which of the following statements is FALSE?

Accepted Answer

A) In a leveraged lease,the lessor borrows from a bank or other lender to obtain the initial capital for the purchase,using the lease payments to pay interest and principal on the loan. 
B) In some circumstances,the lessor is not an independent company but rather a separate business partnership,called a special-purpose entity (SP
E) ,which is created by the lessor for the sole purpose of obtaining the lease. 
C) In a direct lease,the lessor is not the manufacturer,but is often an independent company that specializes in purchasing assets and leasing them to customers. 
D) SPEs are commonly used in synthetic leases,which are designed to obtain specific accounting and tax treatment. 
A) In a leveraged lease,the lessor borrows from a bank or other lender to obtain the initial capital for the purchase,using the lease payments to pay interest and principal on the loan. 
B) In some circumstances,the lessor is not an independent company but rather a separate business partnership,called a special-purpose entity (SP
E) ,which is created by the lessor for the sole purpose of obtaining the lease. 
C) In a direct lease,the lessor is not the manufacturer,but is often an independent company that specializes in purchasing assets and leasing them to customers. 
D) SPEs are commonly used in synthetic leases,which are designed to obtain specific accounting and tax treatment.

Question 18

Calculate the monthly lease payments for a four year fixed price lease that allows the lessee to buy the bulldozer at the end of the lease for $8000.

Accepted Answer

Set calculator to BEG mode (An

Question 19

Assuming that Rearden's annual lease payments are $1.2 million,then the amount of the savings in year 0 from leasing is closest to:

Accepted Answer

A) $3.8 million 
B) $3.9 million 
C) $4.0 million 
D) $4.2 million 
A) $3.8 million 
B) $3.9 million 
C) $4.0 million 
D) $4.2 million

Question 20

Use the information for the question(s)below.
St.Martin's Hospital plans to purchase or lease a $2 million dollar CT scanner.If purchased,the CT scanner will be depreciated on a straight-line basis over five years,after which it will be worthless.If leased,the annual lease payments will be $500,000 per year for five years.St.Martin's borrowing cost is 8%,and its tax rate is 35%.
-If St.Martin purchases the CT scanner,what is the amount of the lease-equivalent loan?

Accepted Answer

First we construct the FCF from leasing

Exam 25: Leasing

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following statements regarding leases and bankruptcy is FALSE?

Which of the following statements regarding leases and taxes is FALSE?

A lease that gives the lessee the option to purchase the asset at its fair market value at the termination of the lease is called a:

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

Assuming that Rearden's annual lease payments are $1.2 million,then the amount of the lease-equivalent loan is closest to:

Suppose that instead of leasing the bulldozer,the company is considering purchasing a bulldozer outright by borrowing the purchase price using a four-year annuity loan.The monthly loan payments for a four year loan to purchase the bulldozer are closest to:

Which of the following statements regarding capital leases is FALSE?

Assuming that Rearden's annual lease payments are $1.2 million,then Rearden Metal should:

A lease will be treated as a non-tax lease if it satisfies any of the following conditions EXCEPT:

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Calculate the monthly lease payments for a four year fixed price lease that allows the lessee to buy the bulldozer at the end of the lease for $8000.

Assuming that Rearden's annual lease payments are $1.2 million,then the amount of the savings in year 0 from leasing is 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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