Exam 16: Lease Financing: Concepts and Techniques

Which of the following statements correctly describes how leasing companies' debt-dominated capital structure impact their cost of borrowing?

Disadvantages of leasing from the lessee's perspective include all of the following EXCEPT

What is normally the impact on the lease payment charged by the lessor if the asset is the only assetin its class?

Winnipeg Lake Cruisers wants to lease two new boats from MidWest Leasing. The cost of the boats is$2 100 000 and the boats have an expected life of 15 years, which is also the term of the financial lease. MidWest's cost of capital is 6% and its tax rate is 45%. The combined Present Value of the tax shield from CCA, the salvage and the tax shield lost due to salvage is $825,783. What is the minimum annual lease payment MidWest can set and earn its required rate of return?

Since CCA is an accelerated tax deduction, more of the deduction is received earlier in the asset's life

A company with a tax rate of 31% is planning to acquire a $225 950 asset that has a 30% CCA rate.The company may purchase the asset or lease it. The cost of borrowing is 11%. The prospectivelessor has a 46% tax rate and a 6.3% 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?

Max Jordan Incorporated has $255 780 in total assets, $80 000 in equity and $175 780 in liabilities.The company is considering a lease with $12 242 in annual lease payments for 6 years. The firstlease payment is due upon signing the lease contract. The company's tax rate is 30% and its borrowing rate is 6.5%. The lessor's implied discount rate is 6.85% and the cost of the asset is $98776. Assuming the lease contract is signed, what is the company's total assets on Day 1 of the lease agreement?

The lease arrangement has many more restrictive covenants than those normally included as part of a long-term loan.

A capital or capitalized lease is otherwise known as

An operating lease is

For which of the assets listed below would an operating lease typically be used?

Ruby's Cube Designers has a balance sheet with $216,332 in total assets, $26 987 in debt and $189345 in equity. The company is about to lease new computers for a 3-year term at a rate of 7.75%and annual payments of $11 018. The useful life of the computers is 5 years. and their purchase costis $37 755. The lessor retains ownership of the computers and the contract has a purchase option so that Ruby's may purchase the computers at the end of the lease at fair market value, estimated at $4000. On the company's balance sheet, what will the amount of total assets be on the day the leasecontract is signed?

Kelly's Restaurants has a balance sheet with $306 503 in total assets, $206 127 in debt and $154 376 in equity. The company is about to lease new equipment for a 5-year term at a rate of 6.25% and annual payments of $22 308. The equipment's useful life is 6 years. On the company's balance sheet, what will the amount of total assets be on the day the lease contract is signed?

Kendore Electric Limited is about to enter into a lease with annual lease payments of $211 550 for a6 year term. The company's tax rate is 28% and its borrowing rate is 6%. The first lease payment isdue when the contract is signed. What is the present value of the after-tax cost of the lease forKendore? Round your final answer to the nearest dollar.

Assume you have analyzed the lease-or-purchase issue for a company. The present value of the cost of leasing is lower than the present value of purchasing the asset. In this situation, what recommendation would you give the company?

A damage deposit paid by the lessee at the beginning of the lease is considered an expense and is therefore tax-deductible when paid, whether or not the lessor keeps the deposit at the end of the lease.

Island Tool and Dye Limited is a Prince Edward Island based manufacturing company considering acquiring new machinery worth $25 956. Island Tool and Dye may purchase the equipment from their supplier or lease it from Town and Country Leasing. The machinery's estimated salvage value after 8 years is estimated at $2 600. Island Tool and Dye's tax rate is 35%, before-tax borrowing rate10%, and the CCA rate is 20%. Keeping in mind that Island Tool and Dye is eligible for the federalInvestment Tax Credit (ITC), what is the present value of the company's cost of purchasing theequipment? Round your final answer to the nearest dollar.

Swank Corporation has made an offer to Brink Manufacturing to lease or purchase machinery that has a useful life of 4 years. The asset sells for $55 000 and has a CCA rate of 20%. The machinery's expected salvage value is $6 000 at the end of its useful life. Swank is willing to guarantee a 4-year bank loan at a 9% interest rate, which is the best rate available, to cover the purchase price. As an alternative to a bank-financed purchase, Swank would consider a 4-year lease of Brink's machinery. The annual lease payment would be $ 12 750, with the first payment due upon signing the lease agreement. Brink Manufacturing's analysis concludes that it makes economic sense to acquire the machinery. Swank's cost of capital is 10% and its tax rate is 30%. Swank's cost of capital is 12% and its tax rate is 40%. What is the present value of Swank's purchasing cost in this case?

Which of the following assets is eligible for the investment tax credit (ITC)?

Pharma Support Limited is considering the lease of new computers from IT Leasing Limited. The computers cost $65 377 and have an estimated economic life of 3 years. The CCA rate is 45% and Pharma Support has a borrowing rate of 12% and a cost of capital of 10%. IT Leasing's borrowing rate is 8% and its cost of capital is 6%. Both companies have a tax rate of 30%. What is the value of the tax shield for IT Leasing?