Question 1

Simpson is considering leasing a $500,000 equipment.Four annual payments of $150,000 are required at the end of each year.Simpson's required rate of return is 6% and has a 40% tax rate.The asset is in the 25% CCA class.The half year rule applies and CCA is taken in year 0.After the fourth year, the asset becomes worthless.Determine the NPV of the lease.
 $$\begin{array}{l}
\begin{array} { | l | r | } 
\hline \text { DATA: }\
\hline \text { Equipment value } & 500,000 \
\hline \text { Lease payments } & 150,000 \
\hline \text { Number of lease payments } & 4 \
\hline \text { Tax rate } & 40 \% \
\hline \text { CCA rate } & 25 \% \
\hline \text { Rate of interest } & 6.00 \% \
\hline \text { After tax rate of interest } & 3.60 \% \
\hline
\end{array}
\end{array}$$

Accepted Answer

The answer of Simpson is considering leasing a $500,000 equipment.Four...

Question 2

A sensible, not dubious, reason for a lease would revolve around preserving capital through leasing rather than putting up the full price through owning.

Accepted Answer

A) True 
 B)False

Question 3

A lessor and lessee are most able to maximize their financial communities of interest through a lease contract if the lessor's tax rate is very high and the lessee's very low.Explain how this would be true, and the implications for the type of firms who lease their assets and the type of companies who operate as lessors.

Accepted Answer

The answer of A lessor and lessee are most able...

Question 4

A sale and leaseback arrangement transfers ownership from a user to a lessor who then leases the asset back to the former owner.

Accepted Answer

A) True 
 B)False

Question 5

If the asset described in above Question had a CCA rate of 30%, with the usual half-year rule, and were leased for 5 years, how would the lessee treat the five years of CCA? The lessee tax rate is 40%.The asset class uses declining balance.

Accepted Answer

A) lessee would calculate the CCA amounts for each of the five years, apply the tax rate against these amounts, and show these amounts as cash outflows. 
B) lessee would calculate the CCA amounts for the entire life of the asset, and show those amounts as cash flows. 
C) lessee would ignore the CCA, since it is the lessor's financial province. 
D) lessee would treat the CCA calculations for each of the five years of the lease as cash inflows for the lessor.

Question 6

If an asset had a $20,000 salvage value at the end of the lease and the asset is sold, it would make no cash flow difference whether the asset pool were terminated or remained open.

Accepted Answer

A) True 
 B)False

Question 7

All of the following must be included on a company's balance sheet except:

Accepted Answer

A) capital leases. 
B) sale and leaseback agreements. 
C) operating leases. 
D) leveraged leases.

Question 8

Because salvage value is a more risky estimate than others in lease analysis, one might do one of the following:

Accepted Answer

A) ignore salvage in one's calculations. 
B) use a higher, risk-adjusted discount rate for salvage value estimates. 
C) reduce the salvage value by half to account for risk. 
D) arrange to sell the asset ahead of time.

Question 9

A financial lease has the following characteristics: Asset cost: $10,000; tax rate: 30%; CCA rate: 20%; after-tax cost of capital: 15%, lease term: 4 years, with $2,500 annual lease payments and tax shields in advance, and salvage and UCC tax shields in Year 4.Salvage is zero.The asset is part of a large pool.What important timing considerations should an analyst watch for in this analysis? What is its present value?

Accepted Answer

The answer of A financial lease has the following characteristics:...

Question 10

The most important issue that makes it possible for both a lessor and lessee to gain from a financial lease arrangement is (aside from risk):

Accepted Answer

A) the lessee's better cash flow. 
B) the lessor's purchasing power for leased assets. 
C) the lessee's higher marginal tax rate. 
D) the lessor's higher marginal tax rate.

Question 11

Generally, equivalent annual cost analyses show that the longer you need an asset, the more likely it is that it is cheaper to buy rather than lease an asset.

Accepted Answer

A) True 
 B)False

Question 12

When one capitalizes a lease, one finds the nominal total of all future lease payments and records them as a liability on right hand side of the balance sheet.

Accepted Answer

A) True 
 B)False

Question 13

Describe how risk plays a role in financial lease analysis, particularly in discount rates, salvage values, maintenance costs and insolvency circumstances.

Accepted Answer

The answer of Describe how risk plays a role in...

Question 14

Off-balance sheet financing implies that:

Accepted Answer

A) leases would be capitalized. 
B) leases would not be capitalized in financial statements. 
C) leases would be amortized in a separate account not in the lessee's balance sheet. 
D) leases show up in the income statement, but not the balance sheet.

Exam 17: Leasing

A sensible, not dubious, reason for a lease would revolve around preserving capital through leasing rather than putting up the full price through owning.

A sale and leaseback arrangement transfers ownership from a user to a lessor who then leases the asset back to the former owner.

If the asset described in above Question had a CCA rate of 30%, with the usual half-year rule, and were leased for 5 years, how would the lessee treat the five years of CCA? The lessee tax rate is 40%.The asset class uses declining balance.

If an asset had a $20,000 salvage value at the end of the lease and the asset is sold, it would make no cash flow difference whether the asset pool were terminated or remained open.

All of the following must be included on a company's balance sheet except:

Because salvage value is a more risky estimate than others in lease analysis, one might do one of the following:

The most important issue that makes it possible for both a lessor and lessee to gain from a financial lease arrangement is (aside from risk) :

Generally, equivalent annual cost analyses show that the longer you need an asset, the more likely it is that it is cheaper to buy rather than lease an asset.

When one capitalizes a lease, one finds the nominal total of all future lease payments and records them as a liability on right hand side of the balance sheet.

Describe how risk plays a role in financial lease analysis, particularly in discount rates, salvage values, maintenance costs and insolvency circumstances.

Off-balance sheet financing implies that: