Question 1

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. D

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%.
-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 B

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.
-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 D

Question 4

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 5

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 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

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 8

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 9

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 10

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 11

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 12

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 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.
-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 a

Question 14

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 15

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 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 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 17

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 18

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 19

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 20

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.

Which of the following is a valid argument for leasing?

Which of the following statements regarding operating leases 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?

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 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?

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 ________.

Which of the following statements regarding capital leases 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 is a valid argument for leasing?

Which of the following statements regarding operating leases 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?

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 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?

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 ________.

Which of the following statements regarding capital leases 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