Question 1

When a lease must be recorded on the balance to meet FAS 13,the asset amount is set equal to the:

Accepted Answer

A) amount of the lease payments due within the next 12 months. 
B) present value of the lease payments. 
C) amount of the lease payments due within the current fiscal year. 
D) present value of the lease payments due within the next 12 months. 
E) total sum of all the remaining lease payments. 
A) amount of the lease payments due within the next 12 months. 
B) present value of the lease payments. 
C) amount of the lease payments due within the current fiscal year. 
D) present value of the lease payments due within the next 12 months. 
E) total sum of all the remaining lease payments.

Question 2

If Alby's leases equipment directly from the equipment's manufacturer the lease must be a:

Accepted Answer

A) leveraged lease. 
B) sales and leaseback arrangement. 
C) capital lease. 
D) sales-type lease. 
E) bargain lease. 
A) leveraged lease. 
B) sales and leaseback arrangement. 
C) capital lease. 
D) sales-type lease. 
E) bargain lease.

Question 3

Which one of these characteristics does not apply to a financial lease?

Accepted Answer

A) The lease is usually not fully amortized. 
B) The lessee is responsible for the maintenance of the leased assets. 
C) Generally,the lease cannot be cancelled. 
D) The lessee usually has the right to renew the lease on expiration. 
E) The lessee must pay all the lease payments. 
A) The lease is usually not fully amortized. 
B) The lessee is responsible for the maintenance of the leased assets. 
C) Generally,the lease cannot be cancelled. 
D) The lessee usually has the right to renew the lease on expiration. 
E) The lessee must pay all the lease payments.

Question 4

All-Tek is considering leasing some new equipment for 5 years with annual payments of $27,500.The equipment would cost $115,000 to buy and would be depreciated straightline to a zero salvage value.The actual salvage value is zero.The firm can borrow at 8 percent and does not expect to owe any taxes for the next several years.What is the maximum lease payment All-Tek would be willing to pay?

Accepted Answer

A) $24,840.00 
B) $23,000.00 
C) $18,842.56 
D) $28,802.49 
E) $21,780.30 
A) $24,840.00 
B) $23,000.00 
C) $18,842.56 
D) $28,802.49 
E) $21,780.30

Question 5

Reed Machinery just signed a capital lease agreement with a present value of $260,000.How would this lease first appear on Reed Machinery's balance sheet?

Accepted Answer

A) Capital leases do not appear on the balance sheet. 
B) Assets under capital lease $260,000; Obligations under capital lease $260,000 
C) Assets under capital lease $130,000; Obligations under capital lease $130,000 
D) Assets under capital lease $260,000; Retained earnings committed to leases $260,000 
E) Assets under capital lease $130,000; Retained earnings committed to leases $130,000 
A) Capital leases do not appear on the balance sheet. 
B) Assets under capital lease $260,000; Obligations under capital lease $260,000 
C) Assets under capital lease $130,000; Obligations under capital lease $130,000 
D) Assets under capital lease $260,000; Retained earnings committed to leases $260,000 
E) Assets under capital lease $130,000; Retained earnings committed to leases $130,000

Question 6

In which one of these cases would both the lessor and the lessee be indifferent to the lease?

Accepted Answer

A) When the lessor's tax rate is lower than the lessee's tax rate. 
B) When the lessor's tax rate is equal to the lessee's tax rate. 
C) When the lessor's tax rate is higher than the lessee's tax rate. 
D) Never,because a lease cannot be beneficial to both parties. 
E) Since leases always have a zero NPV,both parties are automatically indifferent to the lease. 
A) When the lessor's tax rate is lower than the lessee's tax rate. 
B) When the lessor's tax rate is equal to the lessee's tax rate. 
C) When the lessor's tax rate is higher than the lessee's tax rate. 
D) Never,because a lease cannot be beneficial to both parties. 
E) Since leases always have a zero NPV,both parties are automatically indifferent to the lease.

Question 7

When computing the incremental cash flows from leasing relative to purchasing,the:

Accepted Answer

A) cost of the asset is a negative cash flow. 
B) lost depreciation tax benefit is a negative cash flow. 
C) pretax lease payment is a positive cash flow. 
D) lease payments are ignored. 
E) tax benefit of the lease payment is a negative cash flow. 
A) cost of the asset is a negative cash flow. 
B) lost depreciation tax benefit is a negative cash flow. 
C) pretax lease payment is a positive cash flow. 
D) lease payments are ignored. 
E) tax benefit of the lease payment is a negative cash flow.

Question 8

Assume the net present value of a lease relative to a purchase is $150.This indicates that the:

Accepted Answer

A) purchase price is less than the reduction in optimal debt level if leasing. 
B) lease is preferred. 
C) optimal lease payment is $150 per period. 
D) net advantage of leasing is negative. 
E) lease provides an advantage only to the lessor. 
A) purchase price is less than the reduction in optimal debt level if leasing. 
B) lease is preferred. 
C) optimal lease payment is $150 per period. 
D) net advantage of leasing is negative. 
E) lease provides an advantage only to the lessor.

Question 9

Hi-Tek Industries is considering a lease with four annual payments of $4,000 each.The firm can borrow at a rate of 6.7 percent and has a tax rate of 21 percent.The leased asset would cost $15,000 to purchase,have a tax life of 4 years,and would be depreciated on a straightline basis to zero.What would be the incremental cash flow in Year 4 from leasing instead of purchasing if the purchased asset had a pretax salvage value of $500?

Accepted Answer

A) −$4,318.10 
B) −$3,605.50 
C) −$4,211.51 
D) −$4,342.50 
E) −$3,900.00 
A) −$4,318.10 
B) −$3,605.50 
C) −$4,211.51 
D) −$4,342.50 
E) −$3,900.00

Question 10

In a direct lease arrangement,the owner of the asset is:

Accepted Answer

A) either the lessee or the lessor. 
B) the lessee. 
C) the lessor. 
D) either the lessee or the manufacturer. 
E) the asset's manufacturer. 
A) either the lessee or the lessor. 
B) the lessee. 
C) the lessor. 
D) either the lessee or the manufacturer. 
E) the asset's manufacturer.

Question 11

A lessor can borrow at a rate of 7 percent and has a tax rate of 21 percent.The lessee can borrow at a rate of 8 percent and has a tax rate of 21 percent.Assume an asset costs $138,000 and can be leased in exchange for two annual payments of $70,000 with the first payment due at the time of signing.What is the incremental cash flow at Time 0 for the lessee for a purchase instead of a lease?

Accepted Answer

A) −$92,500 
B) $138,000 
C) $92,500 
D) −$82,700 
E) −$138,000 
A) −$92,500 
B) $138,000 
C) $92,500 
D) −$82,700 
E) −$138,000

Question 12

The appropriate discount rate that a lessee should use to value a financial lease is the:

Accepted Answer

A) lessee's aftertax weighted average cost of capital. 
B) lessor's aftertax cost of borrowing. 
C) lessee's aftertax cost of secured borrowing. 
D) capitalization rate stated in the lease contract. 
E) current U.S.Treasury T-bill rate. 
A) lessee's aftertax weighted average cost of capital. 
B) lessor's aftertax cost of borrowing. 
C) lessee's aftertax cost of secured borrowing. 
D) capitalization rate stated in the lease contract. 
E) current U.S.Treasury T-bill rate.

Question 13

The Button Company is considering the purchase of a new machine for $30,000 that has a life of 5 years and would be depreciated on a straightline basis to a zero salvage value over its life.The machine is expected to save the firm $12,500 per year in operating costs.There is no actual salvage value.Alternatively,the firm can lease the machine for $7,300 annually for 5 years,with the first payment due at the end of the first year.The firm's tax rate is 21 percent and its cost of debt is 10 percent.What is the net advantage to leasing for the lessee?

Accepted Answer

A) −$1,134.40 
B) $1,602.15 
C) $1,869.12 
D) −$1,408.16 
E) $1,577.10 
A) −$1,134.40 
B) $1,602.15 
C) $1,869.12 
D) −$1,408.16 
E) $1,577.10

Question 14

A lease with which one of these characteristics would not be qualified by the IRS?

Accepted Answer

A) Term of 25 years 
B) Early balloon payments 
C) Lessee option to purchase asset at fair market value at lease expiration 
D) No lease provision limiting the lessee's right to issue additional debt 
E) Lessee granted first option to meet a competing outside renewal offer 
A) Term of 25 years 
B) Early balloon payments 
C) Lessee option to purchase asset at fair market value at lease expiration 
D) No lease provision limiting the lessee's right to issue additional debt 
E) Lessee granted first option to meet a competing outside renewal offer

Question 15

Which of these are offered as key considerations in the lease versus purchase decision according to the research findings of Smith and Wakeman?

Accepted Answer

A) Price discrimination opportunities and debt displacement options 
B) Cash flows and sensitivity to use and maintenance decisions. 
C) Attracting clients with low prices and debt displacement 
D) Cash flows and debt displacement 
E) Price discrimination opportunities and sensitivity to use and maintenance decisions 
A) Price discrimination opportunities and debt displacement options 
B) Cash flows and sensitivity to use and maintenance decisions. 
C) Attracting clients with low prices and debt displacement 
D) Cash flows and debt displacement 
E) Price discrimination opportunities and sensitivity to use and maintenance decisions

Question 16

Which one of the following is probably the best reason for leasing instead of buying?

Accepted Answer

A) Increased ROA 
B) Circumvented expenditure controls 
C) One hundred percent financing 
D) Tax reduction 
E) Increased uncertainty 
A) Increased ROA 
B) Circumvented expenditure controls 
C) One hundred percent financing 
D) Tax reduction 
E) Increased uncertainty

Question 17

A lease with a term of 6 years calls for annual payments of $2,100.The leased asset would cost $9,200 to buy and would be depreciated straightline to a zero salvage value over the 6 years.The actual salvage value is negligible.The firm can borrow at a rate of 8 percent.What is the NPV of the lease relative to the purchase if the lessee's tax rate is 21 percent?

Accepted Answer

A) $410.22 
B) −$444.04 
C) $444.04 
D) −$410.22 
E) $399.07 
A) $410.22 
B) −$444.04 
C) $444.04 
D) −$410.22 
E) $399.07

Question 18

A leveraged lease typically involves a nonrecourse loan which means that in the case of default the:

Accepted Answer

A) lease payments go directly to the lender. 
B) the lessee obtains a first lien on the leased assets. 
C) lessor is obligated to fulfill the terms of both the lease and the loan. 
D) lessee assumes the loan obligation in exchange for the title to the leased assets. 
E) lease is automatically cancelled. 
A) lease payments go directly to the lender. 
B) the lessee obtains a first lien on the leased assets. 
C) lessor is obligated to fulfill the terms of both the lease and the loan. 
D) lessee assumes the loan obligation in exchange for the title to the leased assets. 
E) lease is automatically cancelled.

Question 19

Why must some debt be eliminated when a firm enters a lease agreement?

Accepted Answer

A) FAS 13 requires an increase in equity equal to the present value of the lease agreement. 
B) Lessors require lessees to reduce their debt to demonstrate an ability to make the lease payments. 
C) FAS 13 requires a debt offset equal to the present value of the lease payments. 
D) Leases are all debt which causes an imbalance in the firm's debt-equity ratio. 
E) FAS 13 requires lease payments be offset by an equal decrease in debt payments. 
A) FAS 13 requires an increase in equity equal to the present value of the lease agreement. 
B) Lessors require lessees to reduce their debt to demonstrate an ability to make the lease payments. 
C) FAS 13 requires a debt offset equal to the present value of the lease payments. 
D) Leases are all debt which causes an imbalance in the firm's debt-equity ratio. 
E) FAS 13 requires lease payments be offset by an equal decrease in debt payments.

Question 20

The lease payment that the lessee sets as its bound is known as the:
A)present value of the tax shields.
B)reservation payment,LMIN.
C)present value of operating savings.
D)reservation payment,LMAX.
E)reservation payment,LOPTIMAL.

Accepted Answer

Exam 21: Leasing

When a lease must be recorded on the balance to meet FAS 13,the asset amount is set equal to the:

If Alby's leases equipment directly from the equipment's manufacturer the lease must be a:

Which one of these characteristics does not apply to a financial lease?

Reed Machinery just signed a capital lease agreement with a present value of $260,000.How would this lease first appear on Reed Machinery's balance sheet?

In which one of these cases would both the lessor and the lessee be indifferent to the lease?

When computing the incremental cash flows from leasing relative to purchasing,the:

Assume the net present value of a lease relative to a purchase is $150.This indicates that the:

In a direct lease arrangement,the owner of the asset is:

The appropriate discount rate that a lessee should use to value a financial lease is the:

A lease with which one of these characteristics would not be qualified by the IRS?

Which of these are offered as key considerations in the lease versus purchase decision according to the research findings of Smith and Wakeman?

Which one of the following is probably the best reason for leasing instead of buying?

A leveraged lease typically involves a nonrecourse loan which means that in the case of default the:

Why must some debt be eliminated when a firm enters a lease agreement?

The lease payment that the lessee sets as its bound is known as the: A)present value of the tax shields. B)reservation payment,LMIN. C)present value of operating savings. D)reservation payment,LMAX. E)reservation payment,LOPTIMAL.

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements and Cash Flow

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

Lessons From Market History

Return, risk, and 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

Filters

The lease payment that the lessee sets as its bound is known as the: A)present value of the tax shields. B)reservation payment,L_MIN. C)present value of operating savings. D)reservation payment,L_MAX. E)reservation payment,L_OPTIMAL.