Question 1

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 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 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 2

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 3

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

Accepted Answer

If the firm acquires the fleet through a

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

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 6

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 7

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 nontax 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 nontax 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 8

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%.
-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 FCF from leasing

Question 9

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 nontax 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 nontax 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 10

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 11

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 12

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.

Question 13

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 14

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

Accepted Answer

A) In a nontax 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 nontax leases. 
A) In a nontax 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 nontax leases.

Question 15

A lease will be treated as a nontax 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 16

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 fixed price lease that allows the lessee to buy the asset at the end of the lease for $12,000. The lease payments will be closest to ________.

Accepted Answer

A) 2,114 
B) 1,825 
C) 1,882 
D) 2,324 
A) 2,114 
B) 1,825 
C) 1,882 
D) 2,324

Question 17

Which of the following statements is FALSE?

Accepted Answer

A) If the lease is deemed to be a true lease, the firm is assumed to have effective ownership of the asset and the asset is protected against seizure. 
B) Although the legal ownership of the asset resides with the lessor, in a nontax lease the lessee receives the depreciation deductions. 
C) The treatment of leased property in bankruptcy will depend on whether the lease is classified as a security interest or a true lease by the bankruptcy judge. 
D) In a nontax lease, the interest portion of the lease payment is interest income for the lessor. 
A) If the lease is deemed to be a true lease, the firm is assumed to have effective ownership of the asset and the asset is protected against seizure. 
B) Although the legal ownership of the asset resides with the lessor, in a nontax lease the lessee receives the depreciation deductions. 
C) The treatment of leased property in bankruptcy will depend on whether the lease is classified as a security interest or a true lease by the bankruptcy judge. 
D) In a nontax lease, the interest portion of the lease payment is interest income for the lessor.

Question 18

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%.
-In the chapter, the lease versus buy decision was called an unfair comparison. Why? What is the correct comparison?

Accepted Answer

When a firm enters into a lease, it is c

Question 19

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 nontax 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 nontax lease. 
D) To determine whether a nontax lease offers a better rate, we discount the lease payments at the firm's pretax 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 nontax 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 nontax lease. 
D) To determine whether a nontax lease offers a better rate, we discount the lease payments at the firm's pretax borrowing rate and compare it to the purchase price of the asset.

Question 20

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.

Exam 24: Leasing

Which of the following statements is FALSE?

Which of the following statements is FALSE?

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

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 ________.

Which of the following statements is FALSE?

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

Which of the following statements is FALSE?

Which of the following statements regarding capital leases is FALSE?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

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

A lease will be treated as a nontax 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?

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

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