Question 1

If a leased asset has maintenance offered as an included extra, such an extra would be evaluated differently from other leasing cash flows in this way.

Accepted Answer

A) Maintenance would be estimated over shorter time intervals than the lease 
B) Maintenance would represent an extra cost to the lessee 
C) Maintenance would be discounted at a higher discount rate to reflect risk, and represent a cash inflow for lessee 
D) Maintenance would all be paid up front

Question 2

Financial leases cover the entire economic life of the asset and are not cancellable.

Accepted Answer

A) True 
 B)False

Question 3

If the asset in Question 64 were exactly equal to its undepreciated capital cost instead of zero, what effect would this change have on the financial lease analysis?

Accepted Answer

A) The salvage would become a benefit of leasing 
B) The change would have no effect on the lease analysis 
C) The terminal loss would disappear and that would be the only change 
D) The terminal loss would disappear and the salvage is now a leasing cost

Question 4

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

The answer of When one capitalizes a lease, one finds...

Question 5

If the asset described in Question 57 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

Describe three major differences between operating and financial leases, pointing out how these differences reflect varying lessor and lessee situations.

Accepted Answer

The answer of Describe three major differences between operating and...

Question 7

You are the manager of a sales division.You are considering leasing a fleet of cars for your staff.You can buy the cars for $300,000 or you can lease them for eight years at $60,000 per year.The company faces a tax rate of 40% and a CCA rate of 10% on vehicles.If the company buys the cars and finances the purchase with a loan, they will pay 7% in interest.Assume that after the term of the lease is over, the salvage value of the cars will be zero.What is the NPV of the lease?

Accepted Answer

A) $9,340 
B) $16,754 
C) $29,521 
D) 34,195

Question 8

When a lease is terminated, the equipment always reverts to the lessor.

Accepted Answer

A) True 
 B)False

Question 9

If a machine costs $50,000, and $5,000 a year for the lessor to maintain and insure, what equivalent annual cost would serve as the basis of a full-service lease payment for a six-year operating lease, paid in arrears, if the lessor's cost of capital is 8%?

Accepted Answer

A) $15,816 
B) $73,114 
C) $17,155 
D) $55,000

Question 10

If a financial lease analysis shows a positive result, which one of the following is true?

Accepted Answer

A) The user should own the asset 
B) The lessor should own the asset 
C) Given the asset choice, the lease terms favour leasing 
D) Leasing is preferable so long as there is no salvage

Question 11

A leveraged lease requires a situation where:

Accepted Answer

A) Lessee loaning part of the asset purchase to the lessor 
B) Lessor selling ownership of the leased asset to others 
C) Lessor borrows part of the asset's price 
D) Lessor loans the lessee funds to maintain the asset

Question 12

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 13

In a financial lease, the lessee can always cancel his lease without penalty.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following is not required to calculate the NPV of a lease?

Accepted Answer

A) Present value of the net benefit that comes from the residual value lost because of leasing 
B) Original purchase price of the asset 
C) Present value of CCA lost 
D) Present value of before-tax lease payments

Question 15

The before-tax cost of risk-free debt is the appropriate discount rate for net present value analysis of lease costs.

Accepted Answer

A) True 
 B)False

Question 16

Sale and lease-back leases involve:

Accepted Answer

A) Real estate transactions only, where lessee and lessor swap land 
B) Situations where the user sells his property and leases it back 
C) Transactions where the land is sold to the lessee at the end of the lease 
D) Land ownership transfers part way through a lease agreement

Question 17

If an asset has a positive salvage of $1,000, exactly equal to UCC, then the lease analysis for an asset alone in its pool will show the following cash flows for that phenomenon. If the asset described above were not alone in its pool, so the pool continued after the leased asset is disposed of, the following would be true.

Accepted Answer

A) The tax shelter would now be larger by $400 
B) The tax shelter implications would be the same as in Question 84 
C) The tax shelter from the asset disposition would be delayed until the pool is terminated 
D) The salvage would be a cost of leasing, minus the lost tax shelter

Question 18

An equivalent loan helps one think about the results associated with financial lease analysis where the viewpoint is from a lessee's perspective, net of the lessor's position.Explain how this is true, and the equivalent loan concept's usefulness in lease analysis.

Accepted Answer

The answer of An equivalent loan helps one think about...

Question 19

Which one of the following is a valid statement about leasing in Canada?

Accepted Answer

A) Less than 5% of machinery and equipment in Canada is leased 
B) Lessors prefer to keep equipment at the end of a lease in order to lease it again 
C) Lessees typically purchase the asset at the end of the lease 
D) Operating leases are particularly useful in the long term

Question 20

If the tax rates of the lessor and lessee are the same, then the financial lease analysis that shows a $500 positive NPV will suggest that:

Accepted Answer

A) The lessor is $500 better off than the lessee 
B) The user should lease, not buy 
C) The lessor should lower his lease terms 
D) The user should buy, not lease

Exam 17: Payout Policy

If a leased asset has maintenance offered as an included extra, such an extra would be evaluated differently from other leasing cash flows in this way.

Financial leases cover the entire economic life of the asset and are not cancellable.

If the asset in Question 64 were exactly equal to its undepreciated capital cost instead of zero, what effect would this change have on the financial lease analysis?

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.

If the asset described in Question 57 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.

Describe three major differences between operating and financial leases, pointing out how these differences reflect varying lessor and lessee situations.

When a lease is terminated, the equipment always reverts to the lessor.

If a machine costs $50,000, and $5,000 a year for the lessor to maintain and insure, what equivalent annual cost would serve as the basis of a full-service lease payment for a six-year operating lease, paid in arrears, if the lessor's cost of capital is 8%?

If a financial lease analysis shows a positive result, which one of the following is true?

A leveraged lease requires a situation where:

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.

In a financial lease, the lessee can always cancel his lease without penalty.

Which of the following is not required to calculate the NPV of a lease?

The before-tax cost of risk-free debt is the appropriate discount rate for net present value analysis of lease costs.

Sale and lease-back leases involve:

An equivalent loan helps one think about the results associated with financial lease analysis where the viewpoint is from a lessee's perspective, net of the lessor's position.Explain how this is true, and the equivalent loan concept's usefulness in lease analysis.

Which one of the following is a valid statement about leasing in Canada?

If the tax rates of the lessor and lessee are the same, then the financial lease analysis that shows a $500 positive NPV will suggest that: