Question 1

If a company leases an asset that qualifies for the investment tax credit (ITC), the lessee receives theITC

Accepted Answer

A) True 
 B)False

Question 2

A company with a tax rate of 32% is planning to acquire a $86 000 asset that has a 30% CCA rate.The company may purchase the asset or lease it. The cost of borrowing is 10%. The prospectivelessor has a 40% 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?

Accepted Answer

A)  The value to the lessee is 126% of the value to the lessor 
B)  The value to the lessee is 96% of the value to the lessor 
C)  The value to the lessor is 105% of the value to the lessee 
D)  The value to the lessor is 126% of the value to the lessee

Question 3

What is the impact on the lease payment charged by lessor if the asset qualifies for the investment tax credit (ITC)?

Accepted Answer

A)  Increase payment 
B)  Cannot be determined 
C)  Decrease payment 
D)  No impact

Question 4

How does the lessor's tax rate affect the present value of the lessor's tax shield on the CCA?

Accepted Answer

A)  The lower the tax rate, the more valuable the tax shield benefit is 
B)  The higher the tax rate, the less valuable the tax shield benefit is 
C)  The higher the tax rate, the more valuable the tax shield benefit is 
D)  The tax rate does not affect the lessor's tax shield value

Question 5

Which of the following statements about how a lessor would set a lease rate (annual lease payment)is correct?

Accepted Answer

A)  The lease payment would be set so that the lessor's rate of return on the lease equals the lessee's rate of borrowing 
B)  The lease payment would be set equal to the average of the maximum the lessee would be willing to pay and the minimum the lessor would have to charge to earn the required return 
C)  The lease payment would be set equal to the maximum the lessee would be willing to pay and still be better off by leasing rather than purchasing the asset 
D)  The lease payment would set equal to the minimum required to ensure the lessor earns a rate of return equal to its cost of capital

Question 6

The type of lease in which the lessor acquires or purchases the asset in order to lease to a givenlessee is known as

Accepted Answer

A)  a financial lease 
B)  a leveraged lease 
C)  an operating lease 
D)  a direct lease

Exam 16: Lease Financing: Concepts and Techniques

If a company leases an asset that qualifies for the investment tax credit (ITC), the lessee receives theITC

What is the impact on the lease payment charged by lessor if the asset qualifies for the investment tax credit (ITC) ?

How does the lessor's tax rate affect the present value of the lessor's tax shield on the CCA?

Which of the following statements about how a lessor would set a lease rate (annual lease payment) is correct?

The type of lease in which the lessor acquires or purchases the asset in order to lease to a givenlessee is known as