Question 1

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 an operating lease, there is no change in the original balance sheet. The fleet is not listed as an asset and the lease is not view as a liability. The transaction is off-balance sheet and will be disclosed in a footnote. Therefore, Luther's balance sheet will look like:

Question 2

Use the information for the question(s)below.
St. Martin's Hospital plans to purchase or lease a $2 million 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%.
-Should St. Martin lease the scanner or borrow the funds and buy the scanner?

Accepted Answer

A) Buy the scanner; the NPV of the decision = $74,890.28. 
B) Buy the scanner; the NPV of the decision = $1,749,890.28 
C) Lease the scanner; the NPV of the decision = $1,812,027.19 
D) Lease the scanner; the NPV of the decision = $692,559.51 
A) Buy the scanner; the NPV of the decision = $74,890.28. 
B) Buy the scanner; the NPV of the decision = $1,749,890.28 
C) Lease the scanner; the NPV of the decision = $1,812,027.19 
D) Lease the scanner; the NPV of the decision = $692,559.51 A

Question 3

Which of the following explains why reducing leverage through off-balance sheet financing is not a valid argument for leasing?

Accepted Answer

A) Whether they appear on the balance sheet or not, lease commitments are liabilities for the firm. 
B) 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. 
C) Some companies may place limits on the dollar amounts a manager can invest over a certain period. 
D) All of the above are reasons why reducing leverage through off-balance sheet financing is not a valid argument for leasing. 
A) Whether they appear on the balance sheet or not, lease commitments are liabilities for the firm. 
B) 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. 
C) Some companies may place limits on the dollar amounts a manager can invest over a certain period. 
D) All of the above are reasons why reducing leverage through off-balance sheet financing is not a valid argument for leasing. A

Question 4

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 $8,000.

Accepted Answer

Set calculator to BEG mode (An

Question 5

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 6

Which of the following statements regarding operating leases is FALSE?

Accepted Answer

A) They are also called a 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 a 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.

Question 7

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 the bulldozer can be leased with a $1.00-out lease. The lease payments will be closest to ________.

Accepted Answer

A) 2,114 
B) 1,825 
C) 2,030 
D) 2,103 
A) 2,114 
B) 1,825 
C) 2,030 
D) 2,103

Question 8

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 9

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.
-Suppose the lease is a five-year fair market value lease, and the trucks have a remaining useful life of 8 years. If the monthly lease payments are $25,000 and the appropriate discount rate is 6% APR with monthly compounding, will the lease be classified as an operating lease or a capital lease for the lessee?

Accepted Answer

A) Capital lease, because the title to the property transfers to the lessee at the end of the lease term. 
B) Capital lease, because the present value of the minimum lease payments at the start of the lease is 90% or more of the asset's fair value. 
C) Operating lease, because the present value of the minimum lease payments at the start of the lease is less than 90% of the asset's fair value. 
D) Operating lease, because the lease term is more than 75% of the estimated economic life of the asset. 
A) Capital lease, because the title to the property transfers to the lessee at the end of the lease term. 
B) Capital lease, because the present value of the minimum lease payments at the start of the lease is 90% or more of the asset's fair value. 
C) Operating lease, because the present value of the minimum lease payments at the start of the lease is less than 90% of the asset's fair value. 
D) Operating lease, because the lease term is more than 75% of the estimated economic life of the asset.

Question 10

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 11

Use the information for the question(s)below.
St. Martin's Hospital plans to purchase or lease a $2 million 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%.
-What is the amount of the lease-equivalent loan for the CT Scanner?

Accepted Answer

A) $74,890.28 
B) $1,749,890.28 
C) $3,487,027.19 
D) $2,367,559.51 
A) $74,890.28 
B) $1,749,890.28 
C) $3,487,027.19 
D) $2,367,559.51

Question 12

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 13

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 14

Which of the following is considered an unfair comparison?

Accepted Answer

A) FMV lease versus $1.00-out lease 
B) $1.00-out lease versus true tax lease 
C) lease versus buy 
D) lease versus borrow 
A) FMV lease versus $1.00-out lease 
B) $1.00-out lease versus true tax lease 
C) lease versus buy 
D) lease versus borrow

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

Use the information for the question(s)below.
St. Martin's Hospital plans to purchase or lease a $2 million 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

Question 17

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 18

Which of the following is a valid argument for leasing?

Accepted Answer

A) tax differences 
B) reduced resale costs 
C) efficiency gains from specialization 
D) All of the above are valid arguments for leasing. 
A) tax differences 
B) reduced resale costs 
C) efficiency gains from specialization 
D) All of the above are valid arguments for leasing.

Question 19

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 20

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).

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

Which of the following explains why reducing leverage through off-balance sheet financing is not a valid argument for leasing?

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 $8,000.

Which of the following statements regarding operating leases is FALSE?

Which of the following statements is FALSE?

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?

Which of the following is considered an unfair comparison?

Which of the following statements is FALSE?

Which of the following is a valid argument for leasing?

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?

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

Time Value of Money: an Introduction

Time Value of Money: Valuing Cash Flow Streams

Interest Rates

Bonds

Stock Valuation

Investment Decision Rules

Fundamentals of Capital Budgeting

Stock Valuation: a Second Look

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

The Cost of Capital

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modeling and Pro Forma Analysis

Working Capital Management

Short-Term Financial Planning

Option Applications and Corporate Finance

Mergers and Acquisitions

International Corporate Finance

Insurance and Risk Management

Corporate Governance

Filters

Exam 24: Leasing

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

Which of the following explains why reducing leverage through off-balance sheet financing is not a valid argument for leasing?

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 $8,000.

Which of the following statements regarding operating leases is FALSE?

Which of the following statements is FALSE?

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?

Which of the following is considered an unfair comparison?

Which of the following statements is FALSE?

Which of the following is a valid argument for leasing?

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?

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

Time Value of Money: an Introduction

Time Value of Money: Valuing Cash Flow Streams

Interest Rates

Bonds

Stock Valuation

Investment Decision Rules

Fundamentals of Capital Budgeting

Stock Valuation: a Second Look

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

The Cost of Capital

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modeling and Pro Forma Analysis

Working Capital Management

Short-Term Financial Planning

Option Applications and Corporate Finance

Mergers and Acquisitions

International Corporate Finance

Insurance and Risk Management

Corporate Governance

Filters