Exam 22: Lease and Intermediate Term Financing

Disadvantages of leasing include all except which of the following?

In the net advantage to leasing calculation, all cash flows (except salvage value) are discounted at the firm's ____.

Leigh Fibers wishes to lease an automated knitting machine valued at $420,000 from Ogden Capital for a period of 10 years. Ogden expects to depreciate the asset on a straight-line basis to a salvage value of $0. Actual salvage value is also expected to be $0 at the end of the 10-year period. If Ogden requires a 15% after-tax rate of return on the lease, what is the lease payment required from Leigh Fibers? Assume that the lease payments will be made at the beginning of each year and that the marginal tax rate is 40%.

Sandia Inc. wants to acquire a $360,000 computer-controlled printing press. If owned, the press would be depreciated on a straight-line basis over 10 years to a book salvage value of $0. The actual cash salvage value is expected to be $25,000 at the end of 10 years. If purchased, Sandia will incur annual maintenance expenses of $3,000. These expenses would not be incurred if the press is leased. If the press is purchased, Sandia could borrow the needed funds at an annual pre-tax interest rate of 10%. The lease rate would be $48,000 per year, payable at the beginning of each year. If Sandia has an after-tax cost of capital of 12% and a marginal tax rate of 40%, what is the net advantage to leasing?

All except which of the following are true of financial leases?

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. Under terms of the lease, payments will be made at the beginning of each of the 4 years. If Wrenn requires a 12% after-tax rate of return on the lease, what is the lease payment that Wrenn will require from Daymark? Assume a marginal tax rate of 40%.

Lease-buy analysis assumes that the alternative to leasing as the source of financing is ____.

All except which of the following are attributes of operating leases?

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 return on the lease, what is the lease payment that Wrenn will require from Contech? Assume a marginal tax rate of 40%. Under the terms of the lease, payments will be made at the beginning of each of the 4 years.

Prime Care has approached the leasing department of First City Bank to arrange lease financing for a $1.2 million CAT scanner. The economic life of the scanner is estimated to be 10 years. The estimated salvage value at the end of 10 years is $0. First City plans to depreciate the scanner on a straight-line basis over 10 years. If First City charges a beginning-of-the-year lease payment of $255,395, what after-tax rate of return will the bank earn on the lease? Assume a marginal tax rate of 40%.

Index Laboratories is considering leasing a thermoplastic molder. The lease would require 7 beginning-of-the-year payments of $122,000 each. If Index capitalizes this lease for financial reporting purposes at a 12% rate, what asset amount will be reported initially on its balance sheet?

Unilog is considering leasing a computer from UniNet under a 6-year lease. The computer costs $200,000 and will be depreciated as a 5-year MACRS asset. The expected salvage value of the computer after 6 years is $20,000. UniNet's marginal tax rate is 35% and its average tax rate is 30%. UniNet requires a 13% after-tax rate of return on leases of this type. What annual, pretax, beginning-of-the-year lease payment must Unilog make to UniNet? (Problem requires MACRS depreciation tables.)

ANB Leasing is planning to lease an asset costing $210,000. The lease period will be 6 years. At the end of 6 years, the salvage value is estimated to be $30,000. The asset will be depreciated on a straight-line basis of $30,000 per year over the 6-year period. ANB's marginal income tax rate is 40%, but its average tax rate is only 31.5%. Assuming ANB Leasing requires a 12% after-tax rate of return on the lease, determine the required annual beginning of the year lease payments.

A primary difference between leveraged leases and other financial leases is that ____.

In a leveraged lease, how much of the asset's full purchase price does the lessor supply?

An operating lease is often referred to as a: I. service lease II. maintenance lease

Medarex is considering the lease of an electronic welder costing $210,000 from Key Leasing. The period of the lease will be 6 years. The welder will be depreciated under MACRS rules for a 5-year class asset. Medarex's marginal tax rate is 40%. Annual beginning-of-the-year lease payments will be $50,000. Estimated salvage value is zero. Assuming Medarex's after-tax cost of borrowing is 15%, compute the net advantage to leasing. (Problem requires MACRS tables.)

In a lease arrangement, the owner of the property is called the ____.

All except which of the following are types of "true leases"?

The contract period of an operating lease tends to ____.