Exam 16: Lease Financing: Concepts and Techniques

With a financial lease, the lessor receives more than the asset's purchase price and earns its required return on the investment.

A financial lease seldom includes a renewal option.

A capitalized lease is a financial lease that has the present value of all its payments included as anasset and corresponding liability on the firm's balance sheet.

When Bantoline Industries and National Leasing Limited entered into a contractual arrangement,one of the stipulations in the contract allowed for National Leasing to sell the leased property backto Bantoline. Leasing contracts with this type of stipulations are called sale-leaseback arrangements.

A sale-leaseback arrangement may be used to alleviate a company's cash flow problems.

Off-balance-sheet financing is no longer permitted in Canada

How will a recapture affect the present value of the cost of purchasing an asset?

The consequences of missing a financial lease payment are___________ those of missing an interest or principal payment on debt.

An asset's undepreciated capital cost (UCC) before sale is $3 977. The asset is sold for $7 456 and its original cost was $34 899. There is a terminal loss of $3 479 in this case

If company A has a tax rate of 30%, and company B has a tax rate of 40%, then the tax shield fromCCA would benefit company B more than company A

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

The payments under a financial lease become a fixed, tax-deductible expenditure that must be paid at predetermined dates.

In which of the following situations would maintenance and insurance cost be included in a lease-or-purchase analysis?

A conditional sales agreement is acceptable to CRA as a leasing arrangement

For which of the assets listed below would a financial lease typically be used?

Only financial leases must be capitalized and disclosed on a company's financial statements.

Sunnybrook Corporation is planning to expand its operations and acquire new equipment at a cost of $325 460. The manufacturer of the new equipment has offered to lease it to Sunnybrook at an attractive rate. For a 10-year lease, which corresponds to the useful life of the new equipment, the annual lease payment would be $40 000 with the first payment due when the contract is signed. As an alternative, Sunnybrook could borrow the $325 460 to finance the purchase of the new equipment. If so, the borrowing rate would be 10% for a 10-year loan with annual payments of $52967. At the end of its useful life, the equipment may be sold at an estimated fair market value of $15000. The new equipment would qualify for the investment tax credit (ITC) of 10% of the purchase cost. Sunnybrook's cost of capital is 8% and their tax rate is 40%. The provincial government may give Sunnybrook a grant of $20 000 if the company goes ahead with the expansion, since it isexpected to create new jobs, but this offer has not been confirmed. The CCA rate for the type of equipment considered is 20%. Which of the following statements best describes your recommendation to Sunnybrook in this situation?

A company with a tax rate of 33% is planning to acquire a $75 000 asset that has a 20% CCA rate.The company may purchase the asset or lease it. The cost of borrowing is 12%. The prospectivelessor has a 45% tax rate and a 6.5% 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?

Incremental operating income associated with an asset are not included in the analysis of whether to lease or purchase the asset.

The lessee is the party to the leasing contract who, under the lease contract, has physical control of the asset, uses the asset and must make the lease payments.