Exam 19: Lease and Intermediate-term Financing

The contract period of an operating lease tends to

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 percent 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%.

What is a term loan?

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 percent, but its average tax rate is only 31.5%. If ANB Leasing requires a 12 percent after-tax rate of return on the lease, determine the required annual beginning of the year lease payments.

All of the following are attributes of operating leases except

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?

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?

All of the following are first determined by the lessee before a direct lease EXCEPT:

Explain a leveraged lease.

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.

What are the advantages of leasing?

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

The type of lease that is a three-sided agreement among the lessee, the lessor and the lenders is:

All of the following are advantages of leasing except

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 percent 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.

All of the following are types of "true leases" EXCEPT:

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?

Which of the following leases is not likely to be viewed as a lease from the perspective of the Internal Revenue Service?

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