Chapter 21 Smartbook

The NPV of a lease is often called the:

Net Advantage of Leasing

Which of the following are some of the bad reasons firms give for leasing instead of buying?

100% financing Off-balance sheet financing

Which of the following is a contractual agreement that gives a person or firm the right to use an asset in return for a monthly payment?

A lease

Which of the following guidelines reflect the IRS's view of a deductible lease?

A term less than 30 years The lease buy out reflects market value. Reasonable renewal options

True or false: Firms are able to completely hide operating lease activity.

False

Because tax shields are important to the economic viability of a lease, interested parties should:

Get an opinion from IRS

The ______ will offer an opinion on whether or not a lessee can deduct lease payments for income tax purposes.

IRS

Which of the following are good reasons to lease instead of buy?

Leasing may reduce transactions costs. Taxes may be reduced. Certain types of uncertainty may be reduced

Financial leases:

are fully amortized

Under the FAS 13, where does the present value of finance lease payments appear?

balance sheet

An operating lease has a cancellation option which allows the _____.

cancel the lease before the expiration date

Monitoring can reduce agency costs from leases and monitoring is:

costly

A lease is in lieu of:

debt

To find the NPV of leasing relative to purchasing, one can discount all cash flows at the after-tax interest rate or compare the purchase price with the reduction in the optimal ______ level under leasing.

debt

Cash flows from a lease are similar to:

debt payments

Debt displacement refers to the replacement of:

debt with a lease liability

Manufacturers can ______ profit if they are the ______.

defer; lessor

ABC Company leases a computer system from an independent leasing company that purchases the system from the manufacturer. This is an example of a ______ lease.

direct

Firms should ______ riskless cash flows at the ______ riskless rate of interest

discount; aftertax

If the corporate income tax were repealed. long-term leasing would probably:

dissapear

Firms that issue ______ amounts of debt may also lease equipment frequently because the corporate attributes that provide _______ debt capacity may also make leasing advantageous.

high; high

Analysis of the cash flows of a lease requires one to account for _________ cash flows

incremental

With an operating lease, the lessor may have to _____.

insure the leased asset sell the asset for its residual value maintain the leased asset

Debt displacement arises when a firm:

leases an asset

The owner of a leased asset is the _____.

lessor

A lease that requires the lessor to fund 50% or less of the purchase price is called a(n):

leveraged lease

Leasing can circumvent laws against charging too ____ a Price

low

The less sensitive the value of an asset is to ____________ decisions, the more likely it is that the asset will be leased instead of purchased.

maintenance

A bad reason for leasing is that leasing can be used to:

manipulate accounting numbers

Firms that issue high amounts of debt may also lease equipment frequently because the corporate attributes that provide high debt capacity:

may also make leasing advantageous

Manufacturing cash inflows will ______ due to the choice of leasing versus buying.

not change

Before 1976, a firm did not have to include leases on its financial statements except in the footnotes. This accounting method was known as:

off-balance sheet financing

Given a choice, firms would classify all their leases as ____ ones

operating

Off-balance sheet financing makes firms with:

operating leases appear stronger than firms with identical capital leases

Some of the agency costs generated by leases may include:

overuse of the asset monitoring costs misuse of the asset

A person with a high level of risk aversion would probably:

prefer leasing over buying

If the net present value of the incremental cash flows from leasing relative to purchasing is negative, the firm will prefer to _______ the asset.

purchase

Long Term leases ______ taxes

reduce

Leasing ______ risk because the lessee does not need to worry about residual value.

reduces

The WACC should not be used for lease analysis because the cash flows do not have as much ______.

risk

A manufacturer supplies a ______ lease while an independent leasing company provides a ______ lease.

sales-type; direct

A sale and leaseback occurs when a company:

sells an asset it owns then leases it back to retain the use of it

FASB 13 states that a lease must be classified as a capital lease if:

the lease transfers ownership of the asset to the lessee at the end of the lease term the lease term is 75% or more of the estimated life of the asset

Under the FAS 13:

the present value of finance lease payments appears on the balance sheet

True or false: Tax effects can explain why both manufacturers and third-party lessors offer leases.

true

The transactions costs for leasing compared to buying are:

usually lower for leasing