Question 1

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 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%.
-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 3

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 4

Which of the following discount rates should be used for the lease versus borrow decision?

Accepted Answer

A)  the risk-free rate of interest 
B)  the company's cost of borrowing 
C)  the company's after-tax cost of borrowing 
D)  the company's weighted average cost of capital 
A)  the risk-free rate of interest 
B)  the company's cost of borrowing 
C)  the company's after-tax cost of borrowing 
D)  the company's weighted average cost of capital

Question 5

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 6

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.

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following discount rates should be used for the lease versus borrow decision?

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

Filters

Exam 24: Leasing

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following discount rates should be used for the lease versus borrow decision?

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

Filters