Question 1

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 for 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 for 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

Question 2

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.
-The CICA Handbook,Section 3065,provides specific criteria that distinguish an operating lease from a capital lease.The lease is treated as a capital lease for the lessee and must be listed on the firm's balance sheet if it satisfies any of the following conditions:

Accepted Answer

1.Title to the property transfers to the lessee at the end of the lease term.
2.The lease contains an option to purchase the asset at a bargain price that is substantially less than its fair market value.
3.The lease term is 75% or more of the estimated economic life of the asset.
4.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.

Question 3

Under CICA,________ is viewed as a rental for accounting purposes.In this case,the lessee reports the entire lease payment as an operating expense.

Accepted Answer

A)  a capital lease 
B)  an operating lease 
C)  a short-term lease 
D)  a temporary lease 
A)  a capital lease 
B)  an operating lease 
C)  a short-term lease 
D)  a temporary lease B

Question 4

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 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

Question 5

A firm under financial stress may suffer from debt overhang whereby new profitable capital projects may not be pursued. Leasing may allow the firm to proceed with these projects because

Accepted Answer

A)  the lease will separate the assets related to the new investment thereby negating the claim from existing bondholders on these assets. 
B)  the lease will carry a lower rate of return than would be the case if the new assets were financed using debt. 
C)  the lease will carry a lower rate of return than would be the case if the new assets were financed using equity. 
D)  since the leaseholders carry a lower seniority than existing bondholders, lease financing cannot be used to avoid the problem of debt overhang. 
A)  the lease will separate the assets related to the new investment thereby negating the claim from existing bondholders on these assets. 
B)  the lease will carry a lower rate of return than would be the case if the new assets were financed using debt. 
C)  the lease will carry a lower rate of return than would be the case if the new assets were financed using equity. 
D)  since the leaseholders carry a lower seniority than existing bondholders, lease financing cannot be used to avoid the problem of debt overhang.

Question 6

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 7

In general,if the asset's CCA deductions are ________ its lease payments,there are tax ________ from a true tax lease if the lessor is in a lower tax bracket than the lessee.

Accepted Answer

A)  more rapid than; gains 
B)  slower than; losses 
C)  slower than; gains 
D)  equal to; losses 
A)  more rapid than; gains 
B)  slower than; losses 
C)  slower than; gains 
D)  equal to; losses

Question 8

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 9

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 10

Under CCA,when evaluating a true tax lease,we should compare leasing to a purchase that is financed with equivalent leverage.Which approaches are suggested?

Accepted Answer

1.Compute the incremental cash flows for

Question 11

The cash flows of leasing differ from buying.A purchase requires a large initial outlay followed by a series of ________.In contrast,the cost of leasing equipment ________.

Accepted Answer

A)  evenly spread cash inflows over time; has more CCA tax shields 
B)  CCA tax shields; has more evenly spread over time 
C)  evenly spread cash outflows over time; has more CCA tax shields 
D)  evenly spread cash inflows over time; has more evenly spread cash outflows over time 
A)  evenly spread cash inflows over time; has more CCA tax shields 
B)  CCA tax shields; has more evenly spread over time 
C)  evenly spread cash outflows over time; has more CCA tax shields 
D)  evenly spread cash inflows over time; has more evenly spread cash outflows over time

Question 12

The tax savings from the lease payments and from CCA deductions are also ________ cash flows,as they are predetermined and will be realized as long as the firm generates positive income.Therefore,a common assumption in practice is to use the firm's ________ for these cash flows as well.

Accepted Answer

A)  low-risk; borrowing rate 
B)  high-risk; borrowing rate 
C)  low-risk; required rate of return 
D)  high-risk; required rate of return 
A)  low-risk; borrowing rate 
B)  high-risk; borrowing rate 
C)  low-risk; required rate of return 
D)  high-risk; required rate of return

Question 13

Special-purpose entity (SPE)is diminishing in Canada as accounting moves to ________.

Accepted Answer

A)  International Financial Reporting Standards 
B)  Generally Accepted Accounting Principles 
C)  standards of the Canadian Institute of Chartered Accountants 
D)  capital cost allowance 
A)  International Financial Reporting Standards 
B)  Generally Accepted Accounting Principles 
C)  standards of the Canadian Institute of Chartered Accountants 
D)  capital cost allowance

Question 14

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 security interests. 
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 compared to 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 security interests. 
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 compared to 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 15

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 an 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 an 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 16

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 of the lessor 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 of the lessor 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 17

A lease where ownership of the asset transfers to the lessee at the end of the lease for a nominal cost is called a

Accepted Answer

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

Question 18

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 lessee 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 lessee 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 19

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 20

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.

Exam 25: Leasing

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

Under CICA,________ is viewed as a rental for accounting purposes.In this case,the lessee reports the entire lease payment as an operating expense.

A firm under financial stress may suffer from debt overhang whereby new profitable capital projects may not be pursued. Leasing may allow the firm to proceed with these projects because

Which of the following statements is false?

In general,if the asset's CCA deductions are ________ its lease payments,there are tax ________ from a true tax lease if the lessor is in a lower tax bracket than the lessee.

Which of the following statements is false?

Which of the following statements is false?

Under CCA,when evaluating a true tax lease,we should compare leasing to a purchase that is financed with equivalent leverage.Which approaches are suggested?

The cash flows of leasing differ from buying.A purchase requires a large initial outlay followed by a series of ________.In contrast,the cost of leasing equipment ________.

The tax savings from the lease payments and from CCA deductions are also ________ cash flows,as they are predetermined and will be realized as long as the firm generates positive income.Therefore,a common assumption in practice is to use the firm's ________ for these cash flows as well.

Special-purpose entity (SPE)is diminishing in Canada as accounting moves to ________.

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

Which of the following statements is false?

Which of the following statements is false?

A lease where ownership of the asset transfers to the lessee at the end of the lease for a nominal cost is called a

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?

The Corporation

Introduction to Financial Statement Analysis

Arbitrage and Financial Decision Making

The Time Value of Money

Interest Rates

Valuing Bonds

Valuing Stocks

Investment Decision Rules

Fundamentals of Capital Budgeting

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behaviour and Capital Market Efficiency

Financial Options

Option Valuation

Real Options

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 Modelling: a Case Study

The Mechanics of Raising Equity Capital

Debt Financing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

Filters

In general,if the asset's CCA deductions are its lease payments,there are tax from a true tax lease if the lessor is in a lower tax bracket than the lessee.

The cash flows of leasing differ from buying.A purchase requires a large initial outlay followed by a series of .In contrast,the cost of leasing equipment .

The tax savings from the lease payments and from CCA deductions are also cash flows,as they are predetermined and will be realized as long as the firm generates positive income.Therefore,a common assumption in practice is to use the firm's for these cash flows as well.