Question 1

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).

Question 2

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 3

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 4

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 5

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 6

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 7

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

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)  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 10

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 11

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 12

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 13

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 14

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 15

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 16

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 17

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 18

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 19

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 20

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

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?

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:

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?

Which of the following is considered an unfair comparison?

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 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 ________.

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

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?

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:

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?

Which of the following is considered an unfair comparison?

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 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 ________.

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