Chapter 19 FIN 3120

All of the following are attributes of operating leases except a. lease period normally equals the economic life of the asset b. lease payments under the initial lease contract are insufficient to recover the full cost of the asset for the lessor c. cancelable d. maintenance and insurance normally are responsibility of lessor

a. lease period normally equals the economic life of the asset

Disadvantages of leasing include all of the following except a. leasing usually decreases a firm's liquidity b. leasing is often more expensive than purchasing c. loss of the asset's salvage value d. lessee may have difficulty getting approval to make property improvements on leased real estate

a. leasing usually decreases a firm's liquidity

In the net advantage to leasing calculation, after-tax salvage value is discounted at the firm's a. weighted (marginal) cost of capital b. cost if internal equity capital c. cost of external equity capital d. after-tax marginal cost of borrowing

a. weighted (marginal) cost of capital

Leasing accounts for more than ____ percent of all business investment in equipment. a. 10 b. 25 c. 50 d. 90

b. 25

All of the following are first determined by the lessee before a direct lease EXCEPT: a. Equipment that will be leased b. What taxes will be paid based on the lease c. Options, warranties service agreements that will have to be made d. What price will be paid for the asset

b. What taxes will be paid based on the lease

Lease-buy analysis assumes that the alternative to leasing as the source of financing is a. buying for cash b. borrowing to buy c. buying with all equity funds d. buying with before-tax dollars

b. borrowing to buy

In a lease arrangement, the owner of the property is called the a. lessee b. lessor c. equity trustee d. lender

b. lessor

Normally, when a firm operates under the protection of a bankruptcy court, lease payments ____. a. may be suspended b. must continue to be paid by lessors c. must be paid to lessors if assets are secured d. may be suspended if they are "true" leases

b. must continue to be paid by lessors

The sale and leaseback is advantageous to the lessee because a. the lessee cannot continue using the asset b. the lessee receives cash from the sale of the asset c. the lessee receives title to property at the termination of the lease d. the lessee is never required to pay taxes and insurance

b. the lessee receives cash from the sale of the asset

An operating lease is often referred to as: I. service lease II. maintenance lease a. I only b. II only c. Both I and II d. Neither I nor II

c. Both I and II

The type of lease that is a three-sided agreement among the lessee, the lessor and the lenders is: a. Leaseback agreement b. Direct lease c. Leveraged lease d. Operating lease

c. Leveraged lease

Which of the following leases is not likely to be viewed as a lease from the perspective of the Internal Revenue Service? a. a 20 year lease for an asset having an economic life estimated to be 40 years b. a lease offering a renewal option based on the asset's remaining value at the time of the renewal c. a lease providing for a purchase option at the end of the lease period for a nominal sum d. a leveraged lease in which the lessor contributes 40 percent equity

c. a lease providing for a purchase option at the end of the lease period for a nominal sum

Leasing offers a number of potential advantages. All of the following are advantages except a. flexibility b. effective depreciation of land c. generally lower costs d. may be the only source of financing available to the marginally profitable firm

c. generally lower costs

A sale and leaseback agreement a. is usually an operating lease b. is rarely used in today's leasing agreements c. is a method of providing liquidity for the lessee d. frequently is used for machinery financing, but rarely used in real estate

c. is a method of providing liquidity for the lessee

In a(n) ____, the lessor receives the entire accelerated depreciation tax shield while making a relatively small equity investment. a. operating lease b. capital lease c. leveraged lease d. term lease

c. leveraged lease

A primary difference between leveraged leases and other financial leases is that a. leveraged leases must be capitalized and shown on the lessee's balance sheet b. the lessor in a leveraged lease is invariably the manufacturer of the leased asset c. leveraged leases involve the use of non-recourse debt d. unleveraged leases are usually tax motivated

c. leveraged leases involve the use of non-recourse debt

Lessees with ____ are most likely to use leveraged leases for large transactions. a. low profit levels b. large amounts of tax exempt income c. low profits and high amounts of tax-exempt income d. outlays of less than $300,000

c. low profits and high amounts of tax-exempt income

All of the following have been cited as advantages of leasing by small businesses except: a. less cash required up front b. fewer restrictive covenants from lessor than lenders c. lower effective interest costs relative to borrowing d. quicker approvals from lessors than from lenders

c. lower effective interest costs relative to borrowing

A capital lease is considered a(n) _________________________agreement. a. negotiable b. cancelable c. noncancelable d. short-term

c. noncancelable

All of the following are disadvantages of leasing except a. difficulty in making property improvements b. financial leases are non-cancelable c. normally higher maintenance charges d. generally higher cost than ownership

c. normally higher maintenance charges

In a direct lease, the user-lessee first determines all of the following EXCEPT: a. which manufacturer will supply the equipment b. what equipment will be leased c. the terms of the lease d. what price will be paid for the asset

c. the terms of the lease

All of the following are types of "true leases" EXCEPT: a. Operating lease b. Capital lease c. Financial lease d. Maturity lease

d. Maturity lease

In considering the advantages of leasing, which of the statements is/are correct? a. Leasing provides approximately 50% of the necessary financing. b. Leasing can decrease the firm's liquidity. c. Both a and b are correct. d. Neither a nor b is correct.

d. Neither a nor b is correct.

In the net advantage to leasing calculation, all cash flows (except salvage value) are discounted at the firm's a. weighted (marginal) cost of capital b. cost of internal equity capital c. pretax marginal cost of borrowing d. after-tax marginal cost of borrowing

d. after-tax marginal cost of borrowing

All of the following are true of financial leases except a. non-cancelable b. lessee is normally responsible for maintenance and insurance c. lease payments are normally sufficient to amortize the original cost of the asset d. all financial leases are also leveraged leases

d. all financial leases are also leveraged leases

All of the following are advantages of leasing except a. generally lower cost than ownership b. leasing smoothes out expenses c. leasing may increase a firm's liquidity d. it provides 100% financing

a. generally lower cost than ownership

The contract period of an operating lease tends to a. be somewhat less than the economic life of an asset b. be equal to the economic life of the asset c. be somewhat greater than the economic life of the asset d. recover the full cost of the asset

a. be somewhat less than the economic life of an asset