Exam 16: Lease Financing: Concepts and Techniques

In a financial lease, the lessor must receive more than the asset's purchase price in order to earn itsrequired return. However, in an operating lease, the total payments made by the lessee to the lessorare generally less than the lessor's initial cost of the leased asset.

The most important reason why leasing has grown so popular as a form of financing is the in-flow of large amounts of low-cost capital that makes attractive deals possible.

What is the minimum required rate of return on a lease from a leasing company that has a tax rateof 45%, and a capital structure that consists of 85%% long-term debt with a cost of 8% and 15%equity with a cost of 15%?

Which of the following statements about a terminal loss is correct?

CICA regulations require explicit disclosure of financial lease obligations on the firm's balance sheet.

A company with a tax rate of 38% is planning to acquire a $1 125 000 asset that has a 30% CCA rate. The company may purchase the asset or lease it. The cost of borrowing is 12%. The prospectivelessor has a 46% tax rate and a 5.5% cost of capital. Which of the following statements is correct about the present value of the tax shield on the CCA to the lessor compared to the present value of the tax shield to the lessee?

Which of the following statements about the handling of a terminal loss in a lease-or-purchase analysis is correct?

A contractual arrangement where the present value of the lease payments equals 75 percent of the fair market value of the leased property will be considered to be a financial lease under the the Canadian Institute of Chartered Accountants (CICA) regulation 3065 (Leases).

The amount recorded on the firm's balance sheet to account for a capital lease is

How is the effect of a recapture calculated in a lease-or-purchase analysis?

If an operational lease is capitalized and disclosed on a company's financial statements, the presentvalue of all remaining lease payments is calculated and entered as an asset termed "Assets underlease", while a corresponding liability is entered as "Obligations under lease".

An asset with a purchase cost of $112 500 and a CCA rate of 20% has a market value of $7 500 at the end of its 12-year life. Assume this asset is the only asset in its class. Which of the following statements about this situation is correct?

Lakemark Corporation has decided to acquire a machine, which will replace an existing piece ofequipment. The company has the choice between leasing the new machine or purchasing it. Theexisting machine is currently worth $8 000, while the new machine would cost $140 226. With the new machine installed, Lakemark would reduce its costs by $22 670 a year. The new machine would have a useful life of 8 years, qualify for a 10% Investment Tax Credit (ITC) and have a salvage value after 8 years of $10 000. This type of machine qualifies for a 20% CCA rate. For an8-year lease the annual payment is expected to be $23 500 with the first payment due upon signing the lease contract. Lakemark's cost of capital is 9%, tax rate is 30% and the cost of raising long-term debt is estimated at 10%. What is the Net Present Value of the lease? Round your final answer tothe nearest dollar.

The total payments of ___________lease over the lease period are greater than the cost of the leased asset to the lessor.

Operating leases need not be capitalized and shown on a company's balance sheet, but they must be included in the notes to the financial statements.

An asset with a purchase cost of $96 422 and a CCA rate of 40% has a market value of $4 000 at the end of its 10-year life. Assume this asset is the only asset in its class. Which of the following statements about this situation is correct?

If the present value of the cost of purchasing an asset exceeds the present value of leasing the asset, the Net Present Value of the lease will be

Which of the following variables would have no impact on the lease payment a lessor would charge:

To capitalize a lease all that is needed is the amount of the annual lease payments

Which of the following statements about a recapture is correct?