Question 1

Leasing accounts for more than ____ percent of all business investment in equipment.

Accepted Answer

A)  10 
B)  25 
C)  50 
D)  90 
A)  10 
B)  25 
C)  50 
D)  90 B

Question 2

A capital lease is considered a ____ agreement.

Accepted Answer

A)  negotiable 
B)  maintenance 
C)  noncancelable 
D)  short-term 
A)  negotiable 
B)  maintenance 
C)  noncancelable 
D)  short-term C

Question 3

In considering the advantages of leasing, which of the following statements is correct?

Accepted Answer

A)  Leasing provides approximately 50% of the necessary financing. 
B)  Leasing can decrease the firm's liquidity. 
C)  Leasing provides approximately 50% of the necessary financing and can decrease the firm's liquidity. 
D)  Leasing is not capable of providing at least 50% of the necessary funding nor can it decrease the firm's liquidity. 
A)  Leasing provides approximately 50% of the necessary financing. 
B)  Leasing can decrease the firm's liquidity. 
C)  Leasing provides approximately 50% of the necessary financing and can decrease the firm's liquidity. 
D)  Leasing is not capable of providing at least 50% of the necessary funding nor can it decrease the firm's liquidity. D

Question 4

Sigma Tools will lease a computerized stamping machine from StarBanc. The machine costs $500,000 and will be depreciated on a straight-line basis to a zero book value over the next 5 years, which is also the term of the lease. The expected salvage value in 5 years is $25,000. StarBanc's marginal tax rate is 30% and it requires an after-tax rate of return of 12% on investments of this type. What annual, beginning-of-the-year, pretax lease payment must StarBanc receive to earn the required 12% return?

Accepted Answer

A)  $135,133 
B)  $93,540 
C)  $94,593 
D)  $100,000 
A)  $135,133 
B)  $93,540 
C)  $94,593 
D)  $100,000

Question 5

Lessees with ____ are most likely to use leveraged leases for large transactions.

Accepted Answer

A)  low profit levels and low levels of tax-loss carryforwards 
B)  high profit levels and large amounts of tax-exempt income 
C)  low profits, large tax-loss carryforwards, and high amounts of tax-exempt income 
D)  low tax-loss carryforwards and low amounts of tax-exempt income 
A)  low profit levels and low levels of tax-loss carryforwards 
B)  high profit levels and large amounts of tax-exempt income 
C)  low profits, large tax-loss carryforwards, and high amounts of tax-exempt income 
D)  low tax-loss carryforwards and low amounts of tax-exempt income

Question 6

T. Goho (lessee) wishes to lease a $25,000 car for 5 years. First Union Bank (lessor) has agreed to finance this lease and estimated the car will have a salvage value of $10,000 at the end of the lease. If First Union expects to depreciate the car on a straight-line basis to a salvage value of $0, what monthly lease payments must T. Goho make, given that First Union requires a 12% annual rate of return (assume a monthly interest rate of 1%)? Assume a marginal tax rate of 40% and payments at the beginning of each month.

Accepted Answer

A)  $528 
B)  $495 
C)  $317 
D)  $653 
A)  $528 
B)  $495 
C)  $317 
D)  $653

Question 7

All except which of the following are first determined by the lessee before a direct lease?

Accepted Answer

A)  Equipment that will be leased 
B)  What taxes will be paid based on the lease 
C)  Options, warranties service agreements that must be made 
D)  What price will be paid for the asset 
A)  Equipment that will be leased 
B)  What taxes will be paid based on the lease 
C)  Options, warranties service agreements that must be made 
D)  What price will be paid for the asset

Question 8

In a direct lease, the user-lessee first determines all except which of the following?

Accepted Answer

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 
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

Question 9

Contech (lessee) wishes to lease a printing press valued at $60,000 from Wrenn Capital (lessor) for a period of 4 years. Wrenn expects to depreciate the asset on a straight-line basis to a salvage value of $0. Actual salvage value is expected to be $8,000 at the end of 4 years. If Wrenn requires a 12% after-tax rate of return on the lease, what is the lessor's amount to be amortized? Assume Wrenn's marginal tax rate is 40%.

Accepted Answer

A)  $60,000 
B)  $38,725 
C)  $41,778 
D)  $36,690 
A)  $60,000 
B)  $38,725 
C)  $41,778 
D)  $36,690

Question 10

What are the disadvantages of leasing?

Accepted Answer

The primary disadvantage is cost. Leasin

Question 11

Lancit Media Productions wishes to lease a high-speed printer that costs $400,000 for a period of 4 years. The leasing company, GKN Leasing, expects to depreciate the entire value of the printer on a straight-line basis over the 4-year period. Actual salvage value is expected to be $50,000. If GKN requires a 12% after-tax rate of return on the lease, what annual lease payments will GKN require? Assume GKN's marginal tax rate is 35% and that all lease payments occur at the beginning of each year.

Accepted Answer

A)  $80,270 
B)  $123,493 
C)  $138,312 
D)  $36,172 
A)  $80,270 
B)  $123,493 
C)  $138,312 
D)  $36,172

Question 12

Daymark (lessee) wishes to lease a printing press valued at $60,000 from Wrenn Capital (lessor) for a period of 4 years. Wrenn expects to depreciate the press using 3-year MARCS depreciation rates. Actual salvage value is expected to be $8,000 at the end of 4 years. If Wrenn requires a 12% after-tax rate of return on the lease, what is the lessor's amount to be amortized? Assume a marginal tax rate of 40%.

Accepted Answer

A)  $40,693 
B)  $38,725 
C)  $37,640 
D)  $35,613 
A)  $40,693 
B)  $38,725 
C)  $37,640 
D)  $35,613

Question 13

Ajax Capital has determined the amount to be amortized on an extruder is $540,000. If the required rate of return is 14%, what will be the total interest received over the life of the lease given that lease payments will be made at the beginning of each of the 7 years of the lease agreement? Assume a marginal tax rate of 40%.

Accepted Answer

A)  $233,269 
B)  $748,784 
C)  $811,080 
D)  $110,467 
A)  $233,269 
B)  $748,784 
C)  $811,080 
D)  $110,467

Question 14

What is a term loan?

Accepted Answer

Term loans include any debt obligation h

Question 15

A sale and leaseback agreement is ____.

Accepted Answer

A)  usually an operating lease 
B)  rarely used in today's leasing agreements 
C)  a method of providing liquidity for the lessee 
D)  frequently used for machinery financing, but rarely used in real estate 
A)  usually an operating lease 
B)  rarely used in today's leasing agreements 
C)  a method of providing liquidity for the lessee 
D)  frequently used for machinery financing, but rarely used in real estate

Question 16

All except which of the following are disadvantages of leasing?

Accepted Answer

A)  Difficulty in making property improvements 
B)  Financial leases are noncancelable 
C)  Normally higher maintenance charges 
D)  Generally higher cost than ownership 
A)  Difficulty in making property improvements 
B)  Financial leases are noncancelable 
C)  Normally higher maintenance charges 
D)  Generally higher cost than ownership

Question 17

Normally, when a firm operates under the protection of a bankruptcy court, lease payments ____.

Accepted Answer

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 
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

Question 18

All except which of the following are advantages of leasing?

Accepted Answer

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 
B)  Leasing smoothes out expenses 
C)  Leasing may increase a firm's liquidity 
D)  It provides 100% financing

Question 19

In a(n) ____, the lessor receives the entire accelerated depreciation tax shield while making a relatively small equity investment.

Accepted Answer

A)  operating lease 
B)  capital lease 
C)  leveraged lease 
D)  term lease 
A)  operating lease 
B)  capital lease 
C)  leveraged lease 
D)  term lease

Question 20

Leasing offers several potential advantages. All except which of the following are advantages?

Accepted Answer

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 
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

Exam 22: Lease and Intermediate Term Financing

Leasing accounts for more than ____ percent of all business investment in equipment.

A capital lease is considered a ____ agreement.

In considering the advantages of leasing, which of the following statements is correct?

Lessees with ____ are most likely to use leveraged leases for large transactions.

All except which of the following are first determined by the lessee before a direct lease?

In a direct lease, the user-lessee first determines all except which of the following?

What are the disadvantages of leasing?

What is a term loan?

A sale and leaseback agreement is ____.

All except which of the following are disadvantages of leasing?

Normally, when a firm operates under the protection of a bankruptcy court, lease payments ____.

All except which of the following are advantages of leasing?

In a(n) ____, the lessor receives the entire accelerated depreciation tax shield while making a relatively small equity investment.

Leasing offers several potential advantages. All except which of the following are advantages?

The Role and Objective of Financial Management

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Evaluation of Financial Performance

Financial Planning and Forecasting

The Time Value of Money

Continuous Compounding and Discounting

Fixed Income Securities: Characteristics and Valuation

Common Stock: Characteristics, Valuation, and Issuance

Analysis of Risk and Return

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Mutually Exclusive Investments Having Unequal Lives

Capital Budgeting: Decision Criteria and Real Option Considerations

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Breakeven Analysis

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Working Capital Policy and Short-Term Financing

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Financing With Derivatives

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