Question 1

The residual value (i.e., salvage value) reduces a lease's cash inflows.

Accepted Answer

A) True 
 B)False  False

Question 2

Capitalizing a lease​

Accepted Answer

A)  ​reduces income 
B)  ​reduces equity 
C)  ​increases current assets 
D)  ​increases debt 
A)  ​reduces income 
B)  ​reduces equity 
C)  ​increases current assets 
D)  ​increases debt D

Question 3

A financial lease is similar to an operating lease, since​

Accepted Answer

A)  ​the firm owns the asset 
B)  ​the lease contract lacks a maintenance clause 
C)  ​the lessor owns the asset 
D)  ​the lease may not be canceled 
A)  ​the firm owns the asset 
B)  ​the lease contract lacks a maintenance clause 
C)  ​the lessor owns the asset 
D)  ​the lease may not be canceled C

Question 4

If a lease is capitalized, the present value of the lease payments is put on the firm's balance sheet as a liability.​

Accepted Answer

A) True 
 B)False

Question 5

​A firm could buy an asset for $20,000 by borrowing the funds at 10 percent for four years with interest paid annually and the entire loan repaid at maturity. The firm could lease the equipment for $5,800 a year including maintenance. If the firm does buy, maintenance will be $600 a year. The estimated after-tax salvage value is $1,250, and depreciation will be $5,000 annually. Construct projected cash outflows for each alternative for each year. Assume a 30 percent income tax rate. Is leasing the better alternative if the firm uses a cost of funds of 10 percent?

Accepted Answer

Determination of cash flows:
​ Cash flow

Question 6

Term notes sold to the general public​

Accepted Answer

A)  are usually for twenty years​ 
B)  ​generally have collateral (i.e., are secured) 
C)  ​are generally non-callable 
D)  ​have variable interest rates 
A)  are usually for twenty years​ 
B)  ​generally have collateral (i.e., are secured) 
C)  ​are generally non-callable 
D)  ​have variable interest rates

Question 7

The use of leasing does not increase the firm's use of financial leverage.​

Accepted Answer

A) True 
 B)False

Question 8

A prime reason for leasing is to receive the depreciation associated with the asset.​

Accepted Answer

A) True 
 B)False

Question 9

The larger an asset's salvage value (i.e., its residual value), the stronger the argument to own instead of leasing.​

Accepted Answer

A) True 
 B)False

Question 10

If a firm sells equipment and subsequently leases it back, that is illustrative of a leveraged lease.​

Accepted Answer

A) True 
 B)False

Question 11

If a firm leases instead of borrowing, it
1) owns the asset
2) has the use of the asset
3) receives the depreciation expense
4) losses the asset's residual value​

Accepted Answer

A) ​1 and 2 
B) ​1 and 3 
C) ​2 and 3 
D) ​2 and 4 
A) ​1 and 2 
B) ​1 and 3 
C) ​2 and 3 
D) ​2 and 4

Question 12

If a firm has a need for finance, it may sell an asset and lease it back.​

Accepted Answer

A) True 
 B)False

Question 13

If a lease is capitalized, the liability is carried on the lessor's balance sheet.​

Accepted Answer

A) True 
 B)False

Question 14

In a sale and leaseback​

Accepted Answer

A)  ​the lessee sells its equipment back to the lessor after a period of time 
B)  ​the lessee sells equipment to a lessor and leases back the equipment 
C)  ​the lessor borrows funds to purchase the asset from the lessee 
D)  ​the lessor sells the asset to the lessee 
A)  ​the lessee sells its equipment back to the lessor after a period of time 
B)  ​the lessee sells equipment to a lessor and leases back the equipment 
C)  ​the lessor borrows funds to purchase the asset from the lessee 
D)  ​the lessor sells the asset to the lessee

Question 15

Operating leases are examples of off‑the‑balance‑sheet financing.​

Accepted Answer

A) True 
 B)False

Question 16

A firm may choose to lease if​

Accepted Answer

A)  ​it is in a lower tax bracket and cannot use the depreciation expense 
B)  ​it depreciates the asset 
C)  ​the present value of its cash outflows under leasing is larger 
D)  ​the asset's residual value is large 
A)  ​it is in a lower tax bracket and cannot use the depreciation expense 
B)  ​it depreciates the asset 
C)  ​the present value of its cash outflows under leasing is larger 
D)  ​the asset's residual value is large

Question 17

Term loans are​

Accepted Answer

A)  ​usually for twenty years 
B)  ​generally lack collateral (i.e., unsecured) 
C)  ​made by insurance companies 
D)  ​short term obligations 
A)  ​usually for twenty years 
B)  ​generally lack collateral (i.e., unsecured) 
C)  ​made by insurance companies 
D)  ​short term obligations

Question 18

A firm could buy an asset for $10,000 by borrowing the funds at 12 percent for four years. Construct the payment schedule for this loan if equal, annual payments retire the loan and pay the interest.​

Accepted Answer

Determination of the annual pa

Question 19

Features of a term loan include
1) restrictive covenants
2) repayment schedules
3) dividend payments​

Accepted Answer

A) 1 and 2​ 
B) ​1 and 3 
C) ​2 and 3 
D) ​only 2 
A) 1 and 2​ 
B) ​1 and 3 
C) ​2 and 3 
D) ​only 2

Question 20

If a lease is not capitalized,
1) the return on assets is overstated
2) the return on assets is understated
3) the use of financial leverage is overstated
4) the use of financial leverage is understated​

Accepted Answer

A) 1 and 3​ 
B) ​1 and 4 
C) ​2 and 3 
D) ​2 and 4 
A) 1 and 3​ 
B) ​1 and 4 
C) ​2 and 3 
D) ​2 and 4

Exam 27: Intermediate-Term Debt and Leasing

The residual value (i.e., salvage value) reduces a lease's cash inflows.

Capitalizing a lease​

A financial lease is similar to an operating lease, since​

If a lease is capitalized, the present value of the lease payments is put on the firm's balance sheet as a liability.​

Term notes sold to the general public​

The use of leasing does not increase the firm's use of financial leverage.​

A prime reason for leasing is to receive the depreciation associated with the asset.​

The larger an asset's salvage value (i.e., its residual value), the stronger the argument to own instead of leasing.​

If a firm sells equipment and subsequently leases it back, that is illustrative of a leveraged lease.​

If a firm leases instead of borrowing, it 1) owns the asset 2) has the use of the asset 3) receives the depreciation expense 4) losses the asset's residual value​

If a firm has a need for finance, it may sell an asset and lease it back.​

If a lease is capitalized, the liability is carried on the lessor's balance sheet.​

In a sale and leaseback​

Operating leases are examples of off‑the‑balance‑sheet financing.​

A firm may choose to lease if​

Term loans are​

A firm could buy an asset for $10,000 by borrowing the funds at 12 percent for four years. Construct the payment schedule for this loan if equal, annual payments retire the loan and pay the interest.​

Features of a term loan include 1) restrictive covenants 2) repayment schedules 3) dividend payments​

If a lease is not capitalized, 1) the return on assets is overstated 2) the return on assets is understated 3) the use of financial leverage is overstated 4) the use of financial leverage is understated​

The Role of Financial Markets and Financial Intermediaries

Investment Banking

Securities Markets

The Federal Reserve

International Currency Flows

The Time Value of Money

Risk and Its Measurement

Analysis of Financial Statements

The Features of Stock

Stock Valuation

The Features of Long-Term Debt - Bonds

Bond Pricing and Yields

Preferred Stock

Convertile Securities

Investment Returns

Investment Companies

Forms of Businss and Corporate Taxation

Break-Even Analysis and the Payback Period

Leverage

Cost of Capital

Capital Budgeting

Forecasting

Cash Budgeting

Management of Current Assets

Management of Short-Term Liabilities

Options: Puts and Calls

Futures and Swaps

Filters

Capitalizing a lease

A financial lease is similar to an operating lease, since

If a lease is capitalized, the present value of the lease payments is put on the firm's balance sheet as a liability.

Term notes sold to the general public

The use of leasing does not increase the firm's use of financial leverage.

A prime reason for leasing is to receive the depreciation associated with the asset.

The larger an asset's salvage value (i.e., its residual value), the stronger the argument to own instead of leasing.

If a firm sells equipment and subsequently leases it back, that is illustrative of a leveraged lease.

If a firm leases instead of borrowing, it 1) owns the asset 2) has the use of the asset 3) receives the depreciation expense 4) losses the asset's residual value

If a firm has a need for finance, it may sell an asset and lease it back.

If a lease is capitalized, the liability is carried on the lessor's balance sheet.

In a sale and leaseback

Operating leases are examples of off‑the‑balance‑sheet financing.

A firm may choose to lease if

Term loans are

A firm could buy an asset for $10,000 by borrowing the funds at 12 percent for four years. Construct the payment schedule for this loan if equal, annual payments retire the loan and pay the interest.

Features of a term loan include 1) restrictive covenants 2) repayment schedules 3) dividend payments

If a lease is not capitalized, 1) the return on assets is overstated 2) the return on assets is understated 3) the use of financial leverage is overstated 4) the use of financial leverage is understated