chapter 17
3 Topic: Lease-Versus-Purchase Decision Learning Obj.: LG 2 Learning Outcome: F-18 Question Status: Revised AACSB Tag: Analytic Skills 17 Copyright © 2015 Pearson Education, Inc. 48) Bessey Aviation is considering leasing or purchasing a small aircraft to transport executives between manufacturing facilities and the main administrative headquarters. The firm is in the 40 percent tax bracket and its after-tax cost of debt is 7 percent. The estimated after-tax cash flows for the lease and purchase alternatives are given below: (a) Given the above cash outflows for each alternative, calculate the present value of the after- tax cash flows using the after-tax cost of debt for each alternative. (b) Which alternative do you recommend? Why?
: (a) (b) The firm should lease the aircraft.
1 Topic: Overview of Hybrids and Derivatives Learning Obj.: LG 1 Learning Outcome: F-29 Question Status: Previous Edition AACSB Tag: Analytic Skills 7) Which of the following securities is a popular hybrid security? A) preferred stock B) common stock C) options D) futures
: A
1 Topic: General Features of Convertibles Learning Obj.: LG 3 Learning Outcome: F-20 Question Status: Revised AACSB Tag: Analytic Skills 30) Convertible bonds normally have ________ to permit the issuer to retire or encourage conversion of outstanding convertibles when appropriate. A) a put feature B) a call feature C) a stock purchase warrant D) a swap feature
: B
1 Topic: Leasing Arrangements Learning Obj.: LG 2 Learning Outcome: F-18 Question Status: Revised AACSB Tag: Analytic Skills 40) In a ________, the lessor acts as an equity participant supplying part of the necessary capital while a lender supplies the remaining balance. A) direct lease B) leveraged lease C) sale-leaseback D) mortgage
: B
1 Topic: Leasing Arrangements Learning Obj.: LG 2 Learning Outcome: F-18 Question Status: Revised AACSB Tag: Analytic Skills 41) A type of lease in which the lessor acquires or purchases the asset in order to lease to a given lessee is known as ________. A) a mortgage B) a direct lease C) a sale-leaseback arrangement D) a leveraged lease
: B
1 Topic: Types of Leases Learning Obj.: LG 2 Learning Outcome: F-18 Question Status: Previous Edition AACSB Tag: Analytic Skills 28) Assets leased under ________ leases generally have a usable life longer than the term of the lease. A) financial B) operating C) capital D) direct
: B
1 Topic: Types of Leases Learning Obj.: LG 2 Learning Outcome: F-18 Question Status: Revised AACSB Tag: Analytic Skills 34) A(n) ________ is a noncancellable arrangement that requires the lessee to make payments for the use of an asset over a relatively long period of time. A) operating lease B) financial lease C) sale-leaseback arrangement D) direct lease
: B
1 Topic: Types of Leases Learning Obj.: LG 2 Learning Outcome: F-17 Question Status: Revised AACSB Tag: Analytic Skills 6) If a lessee leases (under a financial lease) an asset that subsequently becomes obsolete, it can require the lessor to replace it with an equally productive asset in real term over the remaining term of the lease.
: FALSE
1 Topic: Types of Leases Learning Obj.: LG 2 Learning Outcome: F-18 Question Status: Revised AACSB Tag: Analytic Skills 10) A direct lease is a lease under which the lessee sells an asset for cash to a prospective lessor and then leases back the same asset, making fixed periodic payments for its use.
: FALSE
1 Topic: Advantages and Disadvantages of Leasing Learning Obj.: LG 2 Learning Outcome: F-18 Question Status: Previous Edition AACSB Tag: Analytic Skills 26) One disadvantage of leasing is that in many cases, the return to the lessor is quite high so the firm in need of an asset might be better off borrowing to purchase it.
: TRUE
1 Topic: Advantages and Disadvantages of Leasing Learning Obj.: LG 2 Learning Outcome: F-18 Question Status: Previous Edition AACSB Tag: Analytic Skills 8 Copyright © 2015 Pearson Education, Inc. 23) Leasing allows the lessee, in effect, to depreciate land, which is prohibited if the land were purchased.
: TRUE
1 Topic: Advantages and Disadvantages of Leasing Learning Obj.: LG 2 Learning Outcome: F-18 Question Status: Revised AACSB Tag: Analytic Skills 22) When a firm becomes bankrupt or is reorganized, the maximum claim of lessors against the corporation is three years of lease payments.
: TRUE
1 Topic: Financing with Convertibles Learning Obj.: LG 3 Learning Outcome: F-20 Question Status: Previous Edition AACSB Tag: Analytic Skills 22) When the market price of the common stock exceeds the conversion price, the conversion (or stock) value exceeds the par value of the convertible security.
: TRUE
1 Topic: Overview of Hybrids and Derivatives Learning Obj.: LG 1 Learning Outcome: F-09 Question Status: Previous Edition AACSB Tag: Analytic Skills 6) A derivative security is neither debt nor equity but instead derives its value from an underlying asset.
: TRUE
1 Topic: Overview of Hybrids and Derivatives Learning Obj.: LG 1 Learning Outcome: F-29 Question Status: Previous Edition AACSB Tag: Analytic Skills 2) An option is a security that is neither debt nor equity but derives its value from an underlying asset that is often another security.
: TRUE
1 Topic: Overview of Hybrids and Derivatives Learning Obj.: LG 1 Learning Outcome: F-29 Question Status: Previous Edition AACSB Tag: Analytic Skills 3) Preferred stock is considered a hybrid security because it blends the characteristics of both debt and equity.
: TRUE
1 Topic: Convertible Securities Learning Obj.: LG 3 Learning Outcome: F-20 Question Status: Revised AACSB Tag: Analytic Skills 26) Which of the following is true of conversion feature of a bond? A) It adds a degree of speculation to a bond issue, although the issue still maintains its value as a bond. B) It decreases the marketability and liquidity of a bond since conversion feature is perceived by the market as a pessimistic approach about the firm's future. C) It is analogous to the put option, since it gives the bondholders the option to sell the bonds at any time till maturity. D) It increases the cost of debt financing.
: A
1 Topic: Financing with Convertibles Learning Obj.: LG 3 Learning Outcome: F-20 Question Status: Revised AACSB Tag: Analytic Skills 41) The call price of a security generally exceeds the security's par value by an amount equal to ________. A) one year's stated interest B) the straight bond value C) the market value of one share of common stock D) the market premium
: A
1 Topic: Financing with Convertibles Learning Obj.: LG 3 Learning Outcome: F-20 Question Status: Revised AACSB Tag: Reflective Thinking Skills 26 Copyright © 2015 Pearson Education, Inc. 31) Convertible securities can usually be sold with interest rates ________. A) lower than those of other nonconvertible securities B) equal to those of other nonconvertible securities C) higher than those of other nonconvertible securities D) that has no relation to those of other nonconvertible securities
: A
1 Topic: Overview of Hybrids and Derivatives Learning Obj.: LG 1 Learning Outcome: F-09 Question Status: Revised AACSB Tag: Analytic Skills 2 Copyright © 2015 Pearson Education, Inc. 9) In their simplest form, bonds are pure ________. A) debt B) equity C) hybrid security D) current assets
: A
1 Topic: Overview of Hybrids and Derivatives Learning Obj.: LG 1 Learning Outcome: F-09 Question Status: New AACSB Tag: Analytic Skills 8) A form of debt or equity that possesses characteristics of both debt and equity financing is called ________. A) hybrid security B) convertible security C) derivative security D) cumulative security
: A
1 Topic: Overview of Hybrids and Derivatives Learning Obj.: LG 1 Learning Outcome: F-20 Question Status: New AACSB Tag: Analytic Skills 10) A(n) ________ is neither debt nor equity but derives its value from an underlying asset. A) derivative security B) hybrid security C) financing lease D) operating lease
: A
1 Topic: Types of Leases Learning Obj.: LG 2 Learning Outcome: F-18 Question Status: Previous Edition AACSB Tag: Analytic Skills 11 Copyright © 2015 Pearson Education, Inc. 33) A(n) ________ is a cancelable contractual arrangement whereby the lessee agrees to make periodic payments to the lessor, often for 5 or fewer years, to obtain an asset's services. A) operating lease B) financial lease C) capital lease D) direct lease
: A
1 Topic: Types of Leases Learning Obj.: LG 2 Learning Outcome: F-18 Question Status: Previous Edition AACSB Tag: Analytic Skills 29) ________ leases are noncancellable and are generally used for leasing land, buildings, and large pieces of fixed equipment. A) Financial B) Operating C) Leveraged D) Direct
: A
1 Topic: Types of Leases Learning Obj.: LG 2 Learning Outcome: F-18 Question Status: Revised AACSB Tag: Analytic Skills 10 Copyright © 2015 Pearson Education, Inc. 30) The total payments of ________ lease over the lease period are greater than the initial cost of the leased asset to the lessor. A) a financial B) an operating C) a leveraged D) a direct
: A
2 Topic: Types of Leases Learning Obj.: LG 2 Learning Outcome: F-18 Question Status: Previous Edition AACSB Tag: Analytic Skills 16 Copyright © 2015 Pearson Education, Inc. 47) Dwyer Corporation is determining whether to lease or purchase new equipment. The firm is in the 38% tax bracket, and its after-tax cost of debt is currently 7%. The terms of the lease and the purchase are: Lease: Annual end-of-year lease payments of $31,500 are required over the 3-year life of the lease. All maintenance costs will be paid by the lessor; insurance and other costs will be borne by the lessee. The lessee will exercise its option to purchase the equipment for $6,000 at the termination of the lease. Purchase: The equipment, costing $77,000, can be financed entirely with a 12% loan requiring annual end-of-year payments of $32,059 for 3 years. The firm will depreciate the equipment under MACRS using a 3-year recovery period (33% in year 1, 45% in year 2, 15% in year 3 and 7% in year 4). The firm will pay $2,000 per year for a service contract that covers maintenance costs; insurance and other costs will be borne by the firm. The firm plans to keep the equipment and use it beyond its 3-year recovery period. Calculate the present value of the cash outflow for both the lease and purchasing and recommend one alternative. A) The present value of the cash outflow for the lease is $56,151 and for purchasing is $56,775, therefore Dwyer should choose the lease. B) The present value of the cash outflow for the lease is $56,151 and for purchasing is $56,775, therefore Dwyer should choose purchase. C) The present value of the cash outflow for the lease is $64,590 and for purchasing is $65,398, therefore Dwyer should choose the lease. D) The present value of the cash outflow for the lease is $51,178 and for purchasing is $51,703, therefore Dwyer should choose the lease.
: A
1 Topic: Advantages and Disadvantages of Leasing Learning Obj.: LG 2 Learning Outcome: F-18 Question Status: Previous Edition AACSB Tag: Analytic Skills 9 Copyright © 2015 Pearson Education, Inc. 27) A(n) ________ lease is a contractual arrangement whereby the lessee agrees to make periodic payments to the lessor for five or fewer years for an asset's services. This type of lease may also be canceled at the option of the lessee. A) financial B) operating C) capital D) direct
: B
1 Topic: Financing with Convertibles Learning Obj.: LG 3 Learning Outcome: F-20 Question Status: Revised AACSB Tag: Analytic Skills 29 Copyright © 2015 Pearson Education, Inc. 40) Many holders of convertible bonds will not convert when the firm's common stock price exceeds the conversion price because ________. A) the common stock price may go up further and the firm cannot have any other mechanism to stop the bondholders from taking undue advantage of the conversion feature B) they already have the market price benefit and may still receive fixed periodic interest payments C) of the dilution of EPS D) interest payments are tax deductible and it will affect their earnings
: B
1 Topic: Lease-Versus-Purchase Decision Learning Obj.: LG 2 Learning Outcome: F-18 Question Status: Revised AACSB Tag: Analytic Skills 43) The consequences of missing a financial lease payment are ________ those of missing an interest or principal payment on debt. A) less severe than B) the same as C) more severe than D) unrelated to
: B
1 Topic: Leasing Arrangements Learning Obj.: LG 2 Learning Outcome: F-18 Question Status: Revised AACSB Tag: Analytic Skills 13 Copyright © 2015 Pearson Education, Inc. 39) A lease under which a lessor acts as an equity participant, supplying only about 20 percent of the cost of the asset, while a lender supplies the balance is called a(n)________. A) operating lease B) leveraged lease C) sale-leaseback arrangement D) direct lease
: B
1 Topic: Types of Convertible Securities Learning Obj.: LG 3 Learning Outcome: F-20 Question Status: New AACSB Tag: Analytic Skills 27) Convertible preferred stock and convertible bonds are normally convertible over ________, respectively. A) a limited time period and an unlimited time period B) an unlimited time period and a limited time period C) a limited time period and a limited time period D) an unlimited time period and an unlimited time period
: B
1 Topic: Types of Leases Learning Obj.: LG 2 Learning Outcome: F-18 Question Status: Revised AACSB Tag: Analytic Skills 31) Under FASB Standard No. 13, which of the following element should be present to qualify as a capital lease? A) The lease does not transfer ownership of the property to the lessee by the end of the lease. B) The lease contains an option to purchase the property at a "bargain" price. C) The lease term is less than 50 percent of the economic life of the property. D) At the beginning of the lease, the present value of the lease payment is equal to 50 percent or more of the fair market value of the leased property less any investment tax credit received by the lessor.
: B
1 Topic: Types of Leases Learning Obj.: LG 2 Learning Outcome: F-18 Question Status: Revised AACSB Tag: Analytic Skills 35) A capital or capitalized lease is also known as ________. A) an operating lease B) a financial lease C) a direct lease D) a leveraged lease
: B
1 Topic: Convertible Securities Learning Obj.: LG 3 Learning Outcome: F-20 Question Status: Revised AACSB Tag: Analytic Skills 24 Copyright © 2015 Pearson Education, Inc. 25) Which of the following is a characteristic of convertible bonds? A) Conversion increases a firm's debt ratio. B) It is a more expensive form of financing than straight bonds. C) It enhances marketability of a firm's bonds. D) It is nothing but a put option.
: C
1 Topic: Convertible Securities Learning Obj.: LG 3 Learning Outcome: F-20 Question Status: Revised AACSB Tag: Analytic Skills 24) A ________ is an option included as part of a bond or preferred stock that permits the holder to convert the security into a specified number of shares of common stock. A) put option B) call option C) conversion feature D) repurchase agreement
: C
1 Topic: Effects of Leasing on Future Financing Learning Obj.: LG 2 Learning Outcome: F-18 Question Status: Previous Edition AACSB Tag: Analytic Skills 44) Which of the following is a disadvantage of leasing from a lessee's perspective? A) capability of effectively depreciating land B) ability to avoid restrictive covenants that are normally part of a long-term loan C) benefit of the salvage value at the end of the term of the lease reverts to the lessor D) 100 percent debt financing
: C
1 Topic: Financing with Convertibles Learning Obj.: LG 3 Learning Outcome: F-20 Question Status: New AACSB Tag: Analytic Skills 39) When the price of a firm's common stock ________ the conversion price, the market price of the convertible security will ________ to a level close to its conversion value. A) falls below; rise B) rises above; fall C) rises above; rise D) equals; fall
: C
1 Topic: Financing with Convertibles Learning Obj.: LG 3 Learning Outcome: F-20 Question Status: Revised AACSB Tag: Analytic Skills 28 Copyright © 2015 Pearson Education, Inc. 37) An advantage of a convertible security is that it provides deferred common stock financing. The purpose of deferring the sale of common stock is to ________. A) increase the leverage of the firm B) dilute the ownership interest C) minimize dilution in earnings per share D) time the sale of common stock when the price per share is increasing
: C
1 Topic: Financing with Convertibles Learning Obj.: LG 3 Learning Outcome: F-20 Question Status: Revised AACSB Tag: Analytic Skills 32) A ________ allows a firm to force conversion. A) warrant B) option C) call feature D) striking price
: C
1 Topic: Financing with Convertibles Learning Obj.: LG 3 Learning Outcome: F-20 Question Status: Previous Edition AACSB Tag: Analytic Skills 23) Convertible preferred stock is converted into ________. A) secured bonds B) debentures C) shares of common stock D) warrants
: C
1 Topic: Financing with Convertibles Learning Obj.: LG 3 Learning Outcome: F-20 Question Status: Previous Edition AACSB Tag: Analytic Skills 27 Copyright © 2015 Pearson Education, Inc. 34) Many holders of convertible bonds will not convert when the firm's common stock price exceeds the conversion price. To protect itself against this behavior, the firm includes a ________ on the convertible security. A) warrant B) option C) call feature D) striking price
: C
1 Topic: Financing with Convertibles Learning Obj.: LG 3 Learning Outcome: F-20 Question Status: Previous Edition AACSB Tag: Analytic Skills 35) The call price of a security ________ the security's par value. A) is less than B) is equal to C) is greater than D) is less than or equal to
: C
1 Topic: Financing with Convertibles Learning Obj.: LG 3 Learning Outcome: F-20 Question Status: Revised AACSB Tag: Analytic Skills 42) The call privilege is generally not exercised until the conversion value of a security is ________ the call price. A) 5 to 10 percent below B) equal to C) 10 to 15 percent above D) 50 percent above
: C
1 Topic: Financing with Convertibles Learning Obj.: LG 3 Learning Outcome: F-20 Question Status: Previous Edition AACSB Tag: Analytic Skills 33) A convertible security that cannot be forced into conversion using the call feature is ________. A) a general obligation bond B) a debenture C) an overhanging issue D) a noncallable common equity issue
: C
1 Topic: General Features of Convertibles Learning Obj.: LG 3 Learning Outcome: F-20 Question Status: Revised AACSB Tag: Analytic Skills 29) A ________ permits a firm's capital structure to be changed without increasing the total financing. A) put option B) call option C) conversion feature D) repurchase agreement
: C
1 Topic: Leasing Arrangements Learning Obj.: LG 2 Learning Outcome: F-18 Question Status: Previous Edition AACSB Tag: Analytic Skills 38) A lease under which a lessee sells an asset for cash to a prospective lessor and then leases back the same asset is called a(n) ________. A) operating lease B) leveraged lease C) sale-leaseback arrangement D) direct lease
: C
1 Topic: Leasing Arrangements Learning Obj.: LG 2 Learning Outcome: F-18 Question Status: Revised AACSB Tag: Analytic Skills 14 Copyright © 2015 Pearson Education, Inc. 42) Which of the following must be considered when making a lease-versus-purchase decision? A) the before-tax cash outflows for each year under the lease alternative B) the before-tax cash outflows for each year under the purchase alternative C) the after-tax cash outflows for each year under the lease alternative D) the depreciation expense under the lease
: C
1 Topic: Types of Convertible Securities Learning Obj.: LG 3 Learning Outcome: F-20 Question Status: Previous Edition AACSB Tag: Analytic Skills 25 Copyright © 2015 Pearson Education, Inc. 28) At the time of issuance, the issuer of a convertible security normally establishes a conversion price ________. A) below the current book value of the firm's stock B) equal to the current market price of the firm's stock C) above the current market price of the firm's stock D) above the current book value of the firm's stock
: C
1 Topic: Types of Leases Learning Obj.: LG 2 Learning Outcome: F-18 Question Status: Revised AACSB Tag: Analytic Skills 12 Copyright © 2015 Pearson Education, Inc. 36) A ________ is normally initiated by a firm that needs funds for operations. Here, lessors acquire leased assets by purchasing assets already owned by the lessee and leasing them back. A) direct lease B) leveraged lease C) sale-leaseback D) mortgage
: C
1 Topic: Advantages and Disadvantages of Leasing Learning Obj.: LG 2 Learning Outcome: F-18 Question Status: Revised AACSB Tag: Analytic Skills 15 Copyright © 2015 Pearson Education, Inc. 45) Which of the following is an advantage of leasing from a lessee's perspective? A) The return to the lessor is quite high. B) prohibition on leasehold improvements C) Maximum claim of the lessor in the event of bankruptcy is ten years of lease payments. D) Maximum claim of the lessor in the event of bankruptcy is three years of lease payments.
: D
1 Topic: Financing with Convertibles Learning Obj.: LG 3 Learning Outcome: F-20 Question Status: Revised AACSB Tag: Analytic Skills 38) Convertible securities can be issued ________. A) with an intention to raise cheap funds permanently B) with higher rates of interest than nonconvertibles C) to raise funds without affecting the capital structure D) with far fewer restrictive covenants than nonconvertibles
: D
1 Topic: Financing with Convertibles Learning Obj.: LG 3 Learning Outcome: F-20 Question Status: Revised AACSB Tag: Analytic Skills 36) The purchaser of a convertible issue sacrifices a portion of his or her interest return ________. A) to raise temporarily cheap funds B) due to the reduced risk of default in the future C) when the call feature is exercised D) to become a common shareholder in the future
: D
1 Topic: Leasing Arrangements Learning Obj.: LG 2 Learning Outcome: F-18 Question Status: Revised AACSB Tag: Analytic Skills 37) In a(n) ________ a lessor owns or acquires the assets that are leased to a given lessee. A) operating lease B) financial lease C) sale-leaseback arrangement D) direct lease
: D
1 Topic: Types of Leases Learning Obj.: LG 2 Learning Outcome: F-18 Question Status: Revised AACSB Tag: Analytic Skills 32) FASB Standard No. 13 requires explicit disclosure of ________ obligation on the firm's balance sheet. A) an operating lease B) a leveraged lease C) a sale-leaseback D) a capital lease
: D
1 Topic: Advantages and Disadvantages of Leasing Learning Obj.: LG 2 Learning Outcome: F-18 Question Status: Previous Edition AACSB Tag: Analytic Skills 24) A lease arrangement has many more restrictive covenants than those that are normally included as part of a long-term loan.
: FALSE
1 Topic: Advantages and Disadvantages of Leasing Learning Obj.: LG 2 Learning Outcome: F-18 Question Status: Revised AACSB Tag: Analytic Skills 25) One advantage of leasing is that in many cases, the return to the lessor is quite low so the firm in need of an asset might be better off borrowing to purchase it.
: FALSE
1 Topic: Convertible Securities Learning Obj.: LG 3 Learning Outcome: F-20 Question Status: Previous Edition AACSB Tag: Analytic Skills 2) The conversion ratio is the ratio at which a convertible security can be exchanged for a nonconvertible security.
: FALSE
1 Topic: Effects of Leasing on Future Financing Learning Obj.: LG 2 Learning Outcome: F-18 Question Status: Revised AACSB Tag: Analytic Skills 21) At the end of the term of the lease agreement, the terminal value of an asset, if any, is realized by the lessee.
: FALSE
1 Topic: Financing with Convertibles Learning Obj.: LG 3 Learning Outcome: F-20 Question Status: Previous Edition AACSB Tag: Analytic Skills 20) The conversion feature, which can be part of either a bond or preferred stock, permits a firm to raise additional funds at some point in the future by selling common stock, thereby shifting the company's capital structure to a less highly levered position.
: FALSE
1 Topic: Financing with Convertibles Learning Obj.: LG 3 Learning Outcome: F-20 Question Status: Revised AACSB Tag: Analytic Skills 16) Since the purchaser of a convertible security is given an opportunity to become a common stockholder, convertibles can normally be sold with higher interest rates than nonconvertibles.
: FALSE
1 Topic: General Features of Convertibles Learning Obj.: LG 3 Learning Outcome: F-20 Question Status: Previous Edition AACSB Tag: Analytic Skills 20 Copyright © 2015 Pearson Education, Inc. 9) Contingent securities such as common stocks and bonds affect the reporting of a firm's earnings per share (EPS).
: FALSE
1 Topic: Leasing Learning Obj.: LG 2 Learning Outcome: F-18 Question Status: Previous Edition AACSB Tag: Analytic Skills 4) An operating lease is often referred as a capital lease.
: FALSE
1 Topic: Leasing Learning Obj.: LG 2 Learning Outcome: F-17 Question Status: Revised AACSB Tag: Analytic Skills 3 Copyright © 2015 Pearson Education, Inc. 2) A lessor is the receiver of the services of the assets under a lease whereas a lessee is the owner of the assets that are being leased.
: FALSE
1 Topic: Leasing Learning Obj.: LG 2 Learning Outcome: F-17 Question Status: Revised AACSB Tag: Analytic Skills 3) Leasing is considered a source of financing provided by the lessee to the lessor.
: FALSE
1 Topic: Leasing Arrangements Learning Obj.: LG 2 Learning Outcome: F-18 Question Status: Previous Edition AACSB Tag: Analytic Skills 12) Renewal options normally require the lessor to maintain the assets and to make insurance and tax payments.
: FALSE
1 Topic: Leasing Arrangements Learning Obj.: LG 2 Learning Outcome: F-18 Question Status: Previous Edition AACSB Tag: Analytic Skills 16) A leveraged lease is a lease under which the lessee sells an asset for cash to a prospective lessor and then leases back the same asset, making fixed periodic payments for its use.
: FALSE
1 Topic: Leasing Arrangements Learning Obj.: LG 2 Learning Outcome: F-18 Question Status: Previous Edition AACSB Tag: Analytic Skills 6 Copyright © 2015 Pearson Education, Inc. 15) Renewal options are provisions frequently included in both operating and financial leases that allow the lessee to purchase the leased asset at maturity.
: FALSE
1 Topic: Overview of Hybrids and Derivatives Learning Obj.: LG 1 Learning Outcome: F-09 Question Status: Revised AACSB Tag: Analytic Skills 4) A hybrid security is neither debt nor equity but instead derives its value from an underlying asset.
: FALSE
1 Topic: Types of Leases Learning Obj.: LG 2 Learning Outcome: F-18 Question Status: Previous Edition AACSB Tag: Analytic Skills 4 Copyright © 2015 Pearson Education, Inc. 7) An operating lease is noncancellable and obligates the lessee to make payments for the use of an asset over a predefined period of time.
: FALSE
1 Topic: Types of Leases Learning Obj.: LG 2 Learning Outcome: F-18 Question Status: Previous Edition AACSB Tag: Analytic Skills 8) A financial lease is a cancelable contractual arrangement whereby the lessee agrees to make periodic payments to the lessor, often for five or fewer years, for an asset's services.
: FALSE
2 Topic: Lease-Versus-Purchase Decision Learning Obj.: LG 2 Learning Outcome: F-18 Question Status: Revised AACSB Tag: Analytic Skills 18 Copyright © 2015 Pearson Education, Inc. 17.3 Describe the types of convertible securities, their general features, and financing with convertibles. 1) A conversion feature is an option that is included as part of a common stock issue that allows its holder to change the stock into a stated number of shares of preferred stock.
: FALSE
1 Topic: Advantages and Disadvantages of Leasing Learning Obj.: LG 2 Learning Outcome: F-18 Question Status: Revised AACSB Tag: Analytic Skills 46) Lisa's Riding Equipment Company has entered into two lease arrangements. One lease is an operating lease on an office copier requiring annual lease payments of $2,000 for the next three years. The other lease is a 15-year financial lease on a building requiring annual lease payments of $150,000. If the firm's discount rate is 10 percent, how should each lease be presented on the firm's balance sheet?
: Operating lease: The basic features such as the annual lease payment and the term of the lease should be disclosed in a footnote. Financial lease: The building will be listed as an asset with a value of: $150,000 (7.606) = $1,140,900. There will also be a corresponding liability on the balance sheet.
1 Topic: Effects of Leasing on Future Financing Learning Obj.: LG 2 Learning Outcome: F-18 Question Status: Previous Edition AACSB Tag: Analytic Skills 7 Copyright © 2015 Pearson Education, Inc. 19) An operating lease need not be capitalized, but its basic features must be disclosed in a footnote to the financial statements.
: TRUE
1 Topic: Effects of Leasing on Future Financing Learning Obj.: LG 2 Learning Outcome: F-18 Question Status: Previous Edition AACSB Tag: Analytic Skills 20) Since operating leases result in the receipt of services from an asset without increasing the assets or liabilities on a firm's balance sheet, leasing may result in misleading financial ratios.
: TRUE
1 Topic: Effects of Leasing on Future Financing Learning Obj.: LG 2 Learning Outcome: F-18 Question Status: Revised AACSB Tag: Analytic Skills 18) If a lease meets any of the FASB Standards No. 13 criteria, it should be shown as a capitalized lease, meaning the present value of all its payments should be included as an asset and corresponding liability on a firm's balance sheet.
: TRUE
1 Topic: Financing with Convertibles Learning Obj.: LG 3 Learning Outcome: F-20 Question Status: Previous Edition AACSB Tag: Analytic Skills 15) Since the conversion feature provides the purchaser of a convertible bond with the possibility of becoming a stockholder, convertible bonds are a less expensive form of financing than similar-risk nonconvertible or straight bonds.
: TRUE
1 Topic: Financing with Convertibles Learning Obj.: LG 3 Learning Outcome: F-20 Question Status: Revised AACSB Tag: Analytic Skills 11) The conversion feature permits a firm's capital structure to be changed without increasing the total financing.
: TRUE
1 Topic: Financing with Convertibles Learning Obj.: LG 3 Learning Outcome: F-20 Question Status: Previous Edition AACSB Tag: Analytic Skills 12) By using convertible bonds, an issuing firm can temporarily raise debt, which is typically less expensive than common stock, to finance projects.
: TRUE
1 Topic: Financing with Convertibles Learning Obj.: LG 3 Learning Outcome: F-20 Question Status: Previous Edition AACSB Tag: Analytic Skills 14) Convertibles can be used as a form of deferred common stock financing.
: TRUE
1 Topic: Financing with Convertibles Learning Obj.: LG 3 Learning Outcome: F-20 Question Status: Previous Edition AACSB Tag: Analytic Skills 19) An overhanging issue is a convertible security that cannot be forced into conversion by using the call feature.
: TRUE
1 Topic: Financing with Convertibles Learning Obj.: LG 3 Learning Outcome: F-20 Question Status: Previous Edition AACSB Tag: Analytic Skills 21 Copyright © 2015 Pearson Education, Inc. 13) Because a security is first sold with a conversion price above the current market price of a firm's stock, conversion is initially not attractive.
: TRUE
1 Topic: Financing with Convertibles Learning Obj.: LG 3 Learning Outcome: F-20 Question Status: Previous Edition AACSB Tag: Analytic Skills 23 Copyright © 2015 Pearson Education, Inc. 21) Converting a convertible security is beneficial when the market price of the common stock into which it can be converted is greater than its conversion price.
: TRUE
1 Topic: Financing with Convertibles Learning Obj.: LG 3 Learning Outcome: F-20 Question Status: Revised AACSB Tag: Analytic Skills 18) One motive for issuing convertibles is that convertible securities can be issued with far fewer restrictive covenants than nonconvertibles.
: TRUE
1 Topic: Financing with Convertibles Learning Obj.: LG 3 Learning Outcome: F-20 Question Status: Revised AACSB Tag: Analytic Skills 22 Copyright © 2015 Pearson Education, Inc. 17) In case of an overhanging issue, if a firm were to call the issue, the bondholders would accept the call price rather than converting their bonds.
: TRUE
1 Topic: General Features of Convertibles Learning Obj.: LG 3 Learning Outcome: F-20 Question Status: Previous Edition AACSB Tag: Analytic Skills 10) Convertibles can normally be sold with lower interest rates than nonconvertibles.
: TRUE
1 Topic: General Features of Convertibles Learning Obj.: LG 3 Learning Outcome: F-20 Question Status: Previous Edition AACSB Tag: Analytic Skills 3) Diluted earnings per share (EPS) are found by adjusting basic EPS for the impact of converting all convertibles and exercising all warrants and options that would have diluting effects on a firm's earnings.
: TRUE
1 Topic: General Features of Convertibles Learning Obj.: LG 3 Learning Outcome: F-20 Question Status: Previous Edition AACSB Tag: Analytic Skills 4) The presence of contingent securities such as warrants and stock options affects the reporting of a firm's earnings per share.
: TRUE
1 Topic: General Features of Convertibles Learning Obj.: LG 3 Learning Outcome: F-20 Question Status: Previous Edition AACSB Tag: Analytic Skills 6) The conversion value is the value of a convertible security as measured by the market price of the common stock into which it can be converted.
: TRUE
1 Topic: General Features of Convertibles Learning Obj.: LG 3 Learning Outcome: F-20 Question Status: Previous Edition AACSB Tag: Analytic Skills 8) Common stock equivalents are all contingent securities that derive a major portion of their value from their conversion privileges or common stock characteristics.
: TRUE
1 Topic: General Features of Convertibles Learning Obj.: LG 3 Learning Outcome: F-20 Question Status: Revised AACSB Tag: Analytic Skills 19 Copyright © 2015 Pearson Education, Inc. 5) The conversion ratio can be obtained by dividing the par value of the convertible by the conversion price.
: TRUE
1 Topic: General Features of Convertibles Learning Obj.: LG 3 Learning Outcome: F-20 Question Status: Revised AACSB Tag: Analytic Skills 7) Contingent securities such as convertibles, warrants, and stock options affect the reporting of a firm's earnings per share (EPS).
: TRUE
1 Topic: Leasing Arrangements Learning Obj.: LG 2 Learning Outcome: F-18 Question Status: Previous Edition AACSB Tag: Analytic Skills 13) Renewal options are provisions normally included in an operating lease that grant the lessee the right to re-lease assets at the expiration of the lease.
: TRUE
1 Topic: Leasing Arrangements Learning Obj.: LG 2 Learning Outcome: F-18 Question Status: Previous Edition AACSB Tag: Analytic Skills 14) Purchase options are provisions frequently included in both operating and financial leases that allow the lessee to purchase the leased asset at maturity.
: TRUE
1 Topic: Leasing Arrangements Learning Obj.: LG 2 Learning Outcome: F-18 Question Status: Previous Edition AACSB Tag: Analytic Skills 17) An operating lease is when the present value of all its payments included as an asset and corresponding liability on a firm's balance sheet.
: TRUE
1 Topic: Leasing Arrangements Learning Obj.: LG 2 Learning Outcome: F-18 Question Status: Revised AACSB Tag: Analytic Skills 5 Copyright © 2015 Pearson Education, Inc. 11) Maintenance clauses are provisions normally included in an operating lease that require the lessor to maintain the assets and to make insurance and tax payments.
: TRUE
1 Topic: Overview of Hybrids and Derivatives Learning Obj.: LG 1 Learning Outcome: F-09 Question Status: Previous Edition AACSB Tag: Analytic Skills 1 Copyright © 2015 Pearson Education, Inc. 5) A hybrid security is a form of debt or equity financing that possesses characteristics of both debt and equity.
: TRUE
1 Topic: Overview of Hybrids and Derivatives Learning Obj.: LG 1 Learning Outcome: F-29 Question Status: Revised AACSB Tag: Analytic Skills 17.2 Review the types of leases, leasing arrangements, the lease-versus-purchase decision, the effects of leasing on future financing, and the advantages and disadvantages of leasing. 1) A lessee is the receiver of the services of the assets under a lease whereas a lessor is the owner of the assets that are being leased.
: TRUE
1 Topic: Types of Leases Learning Obj.: LG 2 Learning Outcome: F-18 Question Status: Previous Edition AACSB Tag: Analytic Skills 9) In a financial lease, the lessor must receive more than the asset's purchase price in order to earn its required return on the investment.
: TRUE
1 Topic: Types of Leases Learning Obj.: LG 2 Learning Outcome: F-17 Question Status: New AACSB Tag: Analytic Skills 5) A financial lease is often referred as a capital lease.
: TRUE
Principles of Managerial Finance, 14e (Gitman/Zutter) Chapter 17 Hybrid and Derivative Securities 17.1 Differentiate between hybrid and derivative securities and their roles in the corporation. 1) Derivatives are used by corporations as a useful tool for managing certain aspects of a firm's risk.
: TRUE
