Question 1

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 2

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 3

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 4

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 5

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 6

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 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.
-Calculate the monthly lease payments for a four-year $1.00-out lease of the Bulldozer.

Accepted Answer

Set calculator to BEG mode (An

Question 8

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 9

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 10

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 11

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.

Question 12

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 13

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 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.
-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 15

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 16

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 17

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 18

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 19

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 20

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

Exam 24: Leasing

A lease will be treated as a nontax lease if it satisfies any of the following conditions EXCEPT:

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

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

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

Which of the following is considered an unfair comparison?

Which of the following statements is FALSE?

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?

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

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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