Question 1

A synthetic lease is a combination of derivative securities and asset purchases that mimic the cash flows of an operating lease.

Accepted Answer

A) True 
 B)False

Question 2

Under CICA section 3065, a capital lease exists if the lease term is equal to 50% or less of the estimated economic life of the property.

Accepted Answer

A) True 
 B)False

Question 3

Operating leases often include what type of terms?

Accepted Answer

A)   terms including maintenance of the equipment by the lessor
B)   terms including full amortization over the life of the lease
C)   terms including very high penalties if the lease is cancelled
D)   terms including restrictions on how much the leased property can be usedE) All of the above
F) A) and D)

Question 4

When will a lessor likely charge higher lease rates?

Accepted Answer

A)   if the lessor's tax rate increases
B)   if the cost of borrowing increases
C)   if the residual value of the asset increases
D)   if the purchase price of the asset decreasesE) C) and D)
F) B) and D)

Question 5

A sale and leaseback arrangement is a type of financial, or capital, lease.

Accepted Answer

A) True 
 B)False

Question 6

Kohers Inc. is considering a leasing arrangement to finance some manufacturing tools that it need for the next three years. The tools will be obsolete and worthless after 3 years. The firm will depreciate the cost of the tools on a straight-line basis over their 3-year life. It can borrow $4,800,000, the purchase price, at 10% and buy the tools, or it can make 3 equal end-of-year lease payments of $2,100,000 each and lease them. The loan obtained from the bank is a 3-year simple interest loan, with interest paid at the end of the year. The firm's tax rate is 40%. Annual maintenance costs associated with ownership are estimated at $240,000, but this cost would be borne by the lessor if it leases. What is the net advantage to leasing (NAL) , in thousands? (Suggestion: Delete 3 zeros from dollars and work in thousands.)

Accepted Answer

A)   $96
B)   $106
C)   $112
D)   $117E) None of the above
F) A) and B)

Question 7

From the lessee viewpoint, the riskiness of the cash flows, with the possible exception of the residual value, is about the same as what?

Accepted Answer

A)   the lessee's equity cash flows
B)   the lessee's capital budgeting project cash flows
C)   the lessee's debt cash flows
D)   the lessee's pension fund cash flowsE) B) and D)
F) All of the above

Question 8

Which of the following is true?

Accepted Answer

A)   Being the legal owners, lessors can claim full CCA for all assets.
B)   Even with ownership, lessors may claim full CCA on exempt assets only.
C)   As agreed, lessees are allowed to claim the CCA and the lease payment.
D)   The specified leasing property rules discriminate against lessees for non-exempt assets.E) All of the above
F) None of the above

Question 9

Which of the following statements best describes leases?

Accepted Answer

A)   Firms that use "off-balance sheet" financing, such as leasing, would show lower debt ratios if the effects of their leases were reflected in their financial statements.
B)   Capitalizing a lease means that the firm issues equity capital in proportion to its current capital structure, in an amount sufficient to support the lease payment obligation.
C)   The fixed charges associated with a lease can be as high as, but never greater than, the fixed payments associated with a loan.
D)   A key difference between a capital lease and an operating lease is that with a capital lease, the lease payments provide the lessor with a return of the funds invested in the asset plus a return on the invested funds, whereas with an operating lease the lessor depends on the residual value to realize a full return of and on the investment.E) All of the above
F) None of the above

Question 10

Because of down payments, it is cheaper for lessees to lease an asset than to borrow money and purchase the asset.

Accepted Answer

A) True 
 B)False

Question 11

Financial Accounting Standards Board (FASB)  Statement #13 requires that for an unqualified audit report, financial (or capital)  leases must be included in the balance sheet by reporting which of the following?

Accepted Answer

A)   residual value as a fixed asset
B)   residual value as a liability
C)   present value of future lease payments as an asset and also showing this same amount as an offsetting liability
D)   undiscounted sum of future lease payments as an asset and as an offsetting liabilityE) None of the above
F) A) and B)

Question 12

What is the required annual lease payment that the lessor must charge?

Accepted Answer

A)   $17,391
B)   $21,915
C)   $26,535
D)   $29,318E) A) and D)
F) C) and D)

Question 13

Xerox and IBM are good examples of which of the following?

Accepted Answer

A)   firms specializing in lease financing
B)   firms using only leases for asset financing
C)   manufacturers of items that are financed exclusively by firms specializing in lease financing
D)   manufacturers providing lease financing as part of their regular sales effortE) All of the above
F) C) and D)

Question 14

A leveraged lease is more risky from the lessee's standpoint than an unleveraged lease.

Accepted Answer

A) True 
 B)False

Question 15

Leasing is often referred to as off-balance sheet financing because lease payments are shown as operating expenses on a firm's income statement and, under certain conditions, leased assets and associated liabilities do not appear on the firm's balance sheet.

Accepted Answer

A) True 
 B)False

Question 16

A lease versus purchase analysis should compare the cost of leasing to the cost of owning, assuming which of the following?

Accepted Answer

A)   that the asset purchased is financed with short-term debt
B)   that the asset purchased is financed with long-term debt
C)   that the asset purchased is financed with debt whose maturity matches the term of the lease
D)   that the asset purchased is financed with retained earningsE) C) and D)
F) A) and B)

Question 17

Many leases written today combine the features of operating and financial leases. Such leases are often called "combination leases."

Accepted Answer

A) True 
 B)False

Question 18

Leasing is typically a financing decision and not a capital budgeting decision. Thus, the availability of lease financing cannot affect the size of the capital budget.

Accepted Answer

A) True 
 B)False

Question 19

If a lease is capitalized, under the Financial Accounting Standards Board (FASB)  Statement #13 it has which of the following attributes?

Accepted Answer

A)   It shows up as a liability on the lessor's financial statements.
B)   It is a debt on the right-hand side of the lessee's balance sheet, and an asset on the left.
C)   The lease's present value shows as a liability on the lessee's balance sheet, but not as an asset.
D)   The lease becomes a capital asset for the lessor, allowing the firm to capitalize on its value to borrow more.E) B) and D)
F) B) and C)

Exam 15: Lease Financing

A sale and leaseback arrangement is a type of financial, or capital, lease.

Correct Answer
verified

When will a lessor likely charge higher lease rates?

Correct Answer
verified

A synthetic lease is a combination of derivative securities and asset purchases that mimic the cash flows of an operating lease.

Correct Answer
verified

Leasing is often referred to as off-balance sheet financing because lease payments are shown as operating expenses on a firm's income statement and, under certain conditions, leased assets and associated liabilities do not appear on the firm's balance sheet.

Correct Answer
verified

Under CICA section 3065, a capital lease exists if the lease term is equal to 50% or less of the estimated economic life of the property.

Correct Answer
verified

Which of the following statements best describes leases?

Correct Answer
verified

Which of the following is true?

Correct Answer
verified

Xerox and IBM are good examples of which of the following?

Correct Answer
verified

A leveraged lease is more risky from the lessee's standpoint than an unleveraged lease.

Correct Answer
verified

From the lessee viewpoint, the riskiness of the cash flows, with the possible exception of the residual value, is about the same as what?

Correct Answer
verified

If a lease is capitalized, under the Financial Accounting Standards Board (FASB) Statement #13 it has which of the following attributes?

Correct Answer
verified

Many leases written today combine the features of operating and financial leases. Such leases are often called "combination leases."

Correct Answer
verified

A lease versus purchase analysis should compare the cost of leasing to the cost of owning, assuming which of the following?

Correct Answer
verified

What is the required annual lease payment that the lessor must charge?

Correct Answer
verified

Correct Answer
verified

Because of down payments, it is cheaper for lessees to lease an asset than to borrow money and purchase the asset.

Correct Answer
verified

Leasing is typically a financing decision and not a capital budgeting decision. Thus, the availability of lease financing cannot affect the size of the capital budget.

Correct Answer
verified

Operating leases often include what type of terms?

Correct Answer
verified

Financial Accounting Standards Board (FASB) Statement #13 requires that for an unqualified audit report, financial (or capital) leases must be included in the balance sheet by reporting which of the following?

Correct Answer
verified

Exam 15: Lease Financing

A sale and leaseback arrangement is a type of financial, or capital, lease.

Correct AnswerverifiedShow Answer

When will a lessor likely charge higher lease rates?

Correct AnswerverifiedShow Answer

A synthetic lease is a combination of derivative securities and asset purchases that mimic the cash flows of an operating lease.

Correct AnswerverifiedShow Answer

Leasing is often referred to as off-balance sheet financing because lease payments are shown as operating expenses on a firm's income statement and, under certain conditions, leased assets and associated liabilities do not appear on the firm's balance sheet.

Correct AnswerverifiedShow Answer

Under CICA section 3065, a capital lease exists if the lease term is equal to 50% or less of the estimated economic life of the property.

Correct AnswerverifiedShow Answer

Which of the following statements best describes leases?

Correct AnswerverifiedShow Answer

Which of the following is true?

Correct AnswerverifiedShow Answer

Xerox and IBM are good examples of which of the following?

Correct AnswerverifiedShow Answer

A leveraged lease is more risky from the lessee's standpoint than an unleveraged lease.

Correct AnswerverifiedShow Answer

From the lessee viewpoint, the riskiness of the cash flows, with the possible exception of the residual value, is about the same as what?

Correct AnswerverifiedShow Answer

If a lease is capitalized, under the Financial Accounting Standards Board (FASB) Statement #13 it has which of the following attributes?

Correct AnswerverifiedShow Answer

Many leases written today combine the features of operating and financial leases. Such leases are often called "combination leases."

Correct AnswerverifiedShow Answer

A lease versus purchase analysis should compare the cost of leasing to the cost of owning, assuming which of the following?

Correct AnswerverifiedShow Answer

What is the required annual lease payment that the lessor must charge?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Because of down payments, it is cheaper for lessees to lease an asset than to borrow money and purchase the asset.

Correct AnswerverifiedShow Answer

Leasing is typically a financing decision and not a capital budgeting decision. Thus, the availability of lease financing cannot affect the size of the capital budget.

Correct AnswerverifiedShow Answer

Operating leases often include what type of terms?

Correct AnswerverifiedShow Answer

Financial Accounting Standards Board (FASB) Statement #13 requires that for an unqualified audit report, financial (or capital) leases must be included in the balance sheet by reporting which of the following?

Correct AnswerverifiedShow Answer

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