Question 1

The party who owns a leased asset is called the:

Accepted Answer

A) lessee. 
B) lessor. 
C) guarantor. 
D) trustee. 
E) manager.

Question 2

The incremental cash flows of leasing consider which of the following?
I.cost of the asset
II.lease payment amount
III.applicable tax rate
IV.annual depreciation expense

Accepted Answer

A) I and III only 
B) II and IV only 
C) II, III, and IV only 
D) I, II, and IV only 
E) I, II, III, and IV

Question 3

Which one of the following statements is correct concerning the lease versus buy decision?

Accepted Answer

A) The lessor is primarily concerned with returning the asset at the end of the lease term without incurring any additional charges. 
B) The lessor is primarily concerned about the use of the asset. 
C) If Dell Computer became a lessor of its own computers it would be engaging in direct leasing. 
D) A firm should always purchase, rather than lease, any asset that has a projected positive salvage value at the end of the relevant period of use. 
E) Lessors provide a source of financing for lessees.

Question 4

The relevant discount rate for evaluating a lease is the firm's:

Accepted Answer

A) cost of equity financing. 
B) pre-tax cost of borrowing. 
C) aftertax cost of borrowing. 
D) cost of working capital. 
E) rate of return on short-term assets.

Question 5

If a firm does not expect to owe taxes for a few years and needs some equipment,the firm should:

Accepted Answer

A) lease the equipment and retain the tax benefits. 
B) lease the equipment with the lessor retaining the tax ownership of the asset. 
C) borrow the money to buy the asset and then depreciate it using MACRS depreciation. 
D) buy the equipment with cash and depreciate it using MACRS. 
E) buy the equipment and depreciate it straight-line over the life of the asset.

Question 6

Alfredo has a non-cancelable,five year lease on an industrial-grade sewing machine for stitching upholstery.For accounting purposes,this is considered to be a capital lease.The life of the sewing machine is five years.Alfredo must pay all taxes and insurances related to this lease.Which type of lease does Alfredo have on this sewing machine?

Accepted Answer

A) open 
B) straight 
C) operating 
D) financial 
E) tax-oriented

Question 7

Interstate Services needs some equipment costing $61,000.The equipment has a 4-year life after which it will be worthless.The firm uses MACRS depreciation which allows for 33.33 percent,44.44 percent,14.82 percent,and 7.41 percent depreciation over years 1 to 4,respectively.The equipment can be leased for $16,000 a year.The firm can borrow money at 7.5 percent and has a 36 percent tax rate.What is the incremental annual cash flow for year 2 if the company decides to lease the equipment rather than purchase it?

Accepted Answer

A) -$18,897 
B) -$19,286 
C) -$19,389 
D) -$19,407 
E) -$19,999

Question 8

Brentwood Industries is selling its tool and die equipment to Upward Financial and then leasing that equipment from Upward for a period of ten years,which is the useful remaining life of the equipment.Which type of lease arrangement is this?

Accepted Answer

A) leveraged lease 
B) sale and leaseback 
C) operating lease 
D) tax-oriented lease 
E) straight lease

Question 9

The IRS will disallow any lease that:

Accepted Answer

A) has a lease term in excess of three years. 
B) has a term that is less than one-half of the economic life of the asset. 
C) involves a lessee that has net operating losses. 
D) appears to exist solely to defer taxes. 
E) reduces the combined tax obligations of the lessor and the lessee.

Question 10

Northern Lights is trying to decide whether to lease or buy some new equipment.The equipment costs $54,000,has a 5-year life,and will be worthless after the 5 years.The company has a tax rate of 34 percent,a cost of borrowed funds of 8.75 percent,and uses straight-line depreciation.The equipment can be leased for $14,100 a year.What is the amount of the annual depreciation tax shield?

Accepted Answer

A) $3,672 
B) $5,878 
C) $6,936 
D) $8,407 
E) $10,200

Question 11

In a direct lease,the lessor:
I.is the end user of the asset.
II.rents the leased asset from the manufacturer.
III.owns the asset.
IV.is generally an independent leasing company.

Accepted Answer

A) II and III only 
B) I and IV only 
C) III and IV only 
D) II, III, and IV only 
E) I, II, III, and IV

Question 12

Precision Tool is trying to decide whether to lease or buy some new equipment for its tool and die operations.The equipment costs $1.2 million has a 7-year life,and will be worthless after the 7 years.The pre-tax cost of borrowed funds is 8 percent and the tax rate is 32 percent.The equipment can be leased for $242,500 a year.What is the net advantage to leasing?

Accepted Answer

A) -$51,566 
B) -$34,211 
C) $37,549 
D) $56,828 
E) $79,664

Exam 27: Leasing