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) .
F) A) and B)
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A
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A) If a firm only needs to use the asset for a short time,it is probably less costly to lease it than to buy and resell the asset.
B) While owners of assets are likely to resell them only if the assets are "lemons," a short-term lease can commit the user of an asset to return it regardless of its quality.In this way,leases can help mitigate the adverse selection problem in the used goods market.
C) Car dealerships are in a better position to sell a used car at the end of a lease than a consumer is.
D) If the asset's tax depreciation deductions are faster than its lease payments,there are tax gains from a true tax lease if the lessor is in a lower tax bracket than the lessee.
F) A) and B)
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A) fixed price lease.
B) $1.00 out lease.
C) fair market value lease.
D) fair market value cap lease.
F) B) and D)
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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 (FASB) .
C) In its Statement of Financial Accounting Standards No.13 (FAS13) ,the FASB provides specific criteria that distinguish a true tax lease from a non-tax 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.
F) C) and D)
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A) fair market value cap lease.
B) fixed price lease.
C) $1.00 out lease.
D) fair market value lease.
F) A) and B)
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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.
F) B) and C)
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If the firm acquires the fleet through a...View Answer
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A) lease the furnace since the amount saved in year zero from leasing is greater than the amount of the lease equivalent loan.
B) buy the furnace since the amount saved in year zero from leasing is greater than the amount of the lease equivalent loan.
C) lease the furnace since the amount saved in year zero from leasing is less than the amount of the lease equivalent loan.
D) buy the furnace since the amount saved in year zero from leasing is less than the amount of the lease equivalent loan.
F) C) and D)
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A) 8.0%.
B) 12.8%.
C) 15.4%.
D) 4.55%.
F) None of the above
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A) fair market value cap lease.
B) fair market value lease.
C) $1.00 out lease.
D) fixed price lease.
F) A) and D)
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A) Lease payments are a fixed obligation of the firm.
B) The risk of the lease payments is no greater than the risk of secured debt,so it is reasonable to discount the lease payments at the firm's secured borrowing rate.
C) If a firm purchases a piece of equipment,the expense is a capital expenditure.Therefore,the purchase price can be depreciated over time,generating a depreciation tax shield.
D) If the equipment is leased and the lease is a non-tax lease,there is no capital expenditure,but the lease payments are an operating expense.
F) A) and B)
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A) In a non-tax 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 non-tax leases.
F) All of the above
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A) $2115.
B) $1825.
C) $1870.
D) $1750.
F) A) and B)
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A) Leases may include early cancellation options that allow the lessee to end the lease early (perhaps for a fee) .
B) The cost of the lease will depend on the asset's residual value,which is its book value at the end of the lease.
C) Leases may allow the lessee to trade in and upgrade the equipment to a newer model at certain points in the lease.
D) Leases may contain buyout options that allow the lessee to purchase the asset before the end of the lease term.
F) All of the above
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If the firm acquires the fleet through a...View Answer
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A) In a leveraged lease,the lessor borrows from a bank or other lender to obtain the initial capital for the purchase,using the lease payments to pay interest and principal on the loan.
B) In some circumstances,the lessor is not an independent company but rather a separate business partnership,called a special-purpose entity (SPE) ,which is created by the lessor for the sole purpose of obtaining the lease.
C) In a direct lease,the lessor is not the manufacturer,but is often an independent company that specializes in purchasing assets and leasing them to customers.
D) SPEs are commonly used in synthetic leases,which are designed to obtain specific accounting and tax treatment.
F) A) and C)
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B
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A) 2.0.
B) 1.5.
C) 0.80.
D) 0.66.
F) None of the above
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A) Absent market imperfections,leases represent another form of zero-NPV financing available to a firm,and the Modigliani-Miller propositions apply: Leases neither increase nor decrease firm value,but serve only to divide the firm's cash flows and risks in different ways.
B) In a perfect market,the cost of leasing is equivalent to the cost of purchasing and reselling the asset.
C) Each lease agreement can be tailored to fit the precise nature of the asset and the needs of the parties at hand.
D) Features of leases will be priced as part of the lease payment.Terms that give valuable options to the lessee lower the amount of the lease payments,whereas terms that restrict these options will raise them.
F) C) and D)
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D
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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.
F) B) and C)
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First we construct the FCF from leasing ...View Answer
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