Question 1

Which of the following statements is false?

Accepted Answer

A)  In a direct lease, the lessor is the manufacturer (or a primary dealer) of the asset. 
B)  The lease specifies any cancellation provisions, the options for renewal and purchase, and the obligations for maintenance and related servicing costs. 
C)  If a firm already owns an asset it would prefer to lease, it can arrange a sale and leaseback transaction. 
D)  With many leases, the lessor provides the initial capital necessary to purchase the asset, and then receives and retains the lease payments. 
A)  In a direct lease, the lessor is the manufacturer (or a primary dealer) of the asset. 
B)  The lease specifies any cancellation provisions, the options for renewal and purchase, and the obligations for maintenance and related servicing costs. 
C)  If a firm already owns an asset it would prefer to lease, it can arrange a sale and leaseback transaction. 
D)  With many leases, the lessor provides the initial capital necessary to purchase the asset, and then receives and retains the lease payments.

Question 2

In order to further understand Capital Cost Allowance (CCA),________ of exempt assets are referred to as ________ and other leases are referred to as non-tax leases.

Accepted Answer

A)  operating leases and financial leases; true tax leases 
B)  temporary leases and capital leases; true tax leases 
C)  long-term leases and financial leases; true tax leases 
D)  capital leases and financial leases; true tax leases 
A)  operating leases and financial leases; true tax leases 
B)  temporary leases and capital leases; true tax leases 
C)  long-term leases and financial leases; true tax leases 
D)  capital leases and financial leases; true tax leases

Question 3

In a perfect market,where lessors compete with one another in initiating,the cost of leasing and then purchasing the asset ________ the cost of borrowing to purchase the asset.

Accepted Answer

A)  is greater than 
B)  is equivalent to 
C)  is less than 
D)  is double 
A)  is greater than 
B)  is equivalent to 
C)  is less than 
D)  is double

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)  $1,870 
B)  $1,825 
C)  $1,750 
D)  $2,115 
A)  $1,870 
B)  $1,825 
C)  $1,750 
D)  $2,115

Question 5

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%.
-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 FCFs from leasing

Question 6

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 7

When publicly traded firms disclose leasing transactions in their financial statements,they must follow ________.

Accepted Answer

A)  the Capital Cost Allowance (CC
A)  
B)  the Generally Accepted Accounting Principles (GAAP) 
C)  the International Financial Reporting Standards (IFRS) 
D)  the standards of the Canadian Institute of Chartered Accountants (CIC
A)  
A)  the Capital Cost Allowance (CC
A)  
B)  the Generally Accepted Accounting Principles (GAAP) 
C)  the International Financial Reporting Standards (IFRS) 
D)  the standards of the Canadian Institute of Chartered Accountants (CIC
A)

Question 8

In Canada,with the new standards,if the purpose of the SPE is solely to benefit the related company,the SPE ________ its related company.

Accepted Answer

A)  must be split up from 
B)  must be audited in 
C)  must be separated from 
D)  must be consolidated with 
A)  must be split up from 
B)  must be audited in 
C)  must be separated from 
D)  must be consolidated with

Question 9

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.
-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)  $2,115 
B)  $1,825 
C)  $1,870 
D)  $1,750 
A)  $2,115 
B)  $1,825 
C)  $1,870 
D)  $1,750

Question 10

The CICA distinguishes two types of leases based on the lease terms,and this classification determines the lease's accounting treatment.The two types of leases are

Accepted Answer

A)  fixed leases and variable leases. 
B)  long-term leases and short-term leases. 
C)  operating leases and capital leases. 
D)  temporary leases and permanent leases. 
A)  fixed leases and variable leases. 
B)  long-term leases and short-term leases. 
C)  operating leases and capital leases. 
D)  temporary leases and permanent leases.

Question 11

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.

Question 12

Calculate the monthly lease payments for a four-year $1.00 out lease of the bulldozer.

Accepted Answer

Set calculator to BEG mode (An

Question 13

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 14

A lease where the lessee has the option to purchase the asset at the end of the lease for a set price that is set upfront in the lease contract is called a

Accepted Answer

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

Question 15

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 16

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 17

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 18

Under CICA,________ is viewed as an acquisition for accounting purposes.The asset acquired is listed on the lessee's balance sheet,and the lessee incurs depreciation expenses for the asset.

Accepted Answer

A)  a capital lease 
B)  an operating lease 
C)  a long-term lease 
D)  a permanent lease 
A)  a capital lease 
B)  an operating lease 
C)  a long-term lease 
D)  a permanent lease

Exam 25: Leasing

Which of the following statements is false?

In order to further understand Capital Cost Allowance (CCA),________ of exempt assets are referred to as ________ and other leases are referred to as non-tax leases.

In a perfect market,where lessors compete with one another in initiating,the cost of leasing and then purchasing the asset ________ the cost of borrowing to purchase the asset.

Which of the following statements is false?

When publicly traded firms disclose leasing transactions in their financial statements,they must follow ________.

In Canada,with the new standards,if the purpose of the SPE is solely to benefit the related company,the SPE ________ its related company.

The CICA distinguishes two types of leases based on the lease terms,and this classification determines the lease's accounting treatment.The two types of leases are

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:

Calculate the monthly lease payments for a four-year $1.00 out lease of the bulldozer.

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

A lease where the lessee has the option to purchase the asset at the end of the lease for a set price that is set upfront in the lease contract is called a

Which of the following statements is false?

Which of the following statements is false?

Which of the following statements is false?

Under CICA,________ is viewed as an acquisition for accounting purposes.The asset acquired is listed on the lessee's balance sheet,and the lessee incurs depreciation expenses for the asset.

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 order to further understand Capital Cost Allowance (CCA), of exempt assets are referred to as and other leases are referred to as non-tax leases.