Deck 16: Lease Financing: Concepts and Techniques

Question 1

An asset with a purchase cost of $256 422 and a CCA rate of 30% has a market value of $31 000 atthe end of its 8-year life. Assume this asset is the only asset in its class and the asset class is about tobe closed out. The company's tax rate is 30% and its cost of capital is 10%. What is the Present Value of the tax shield lost due to the Undepreciated Capital Cost (UCC) in this case?

A) $401
B) $221
C) $375
D) $298

Answer 1

$375

Question 2

An asset with a purchase cost of $112 500 and a CCA rate of 20% has a market value of $7 500 at theend of its 12-year life. Assume this asset is the only asset in its class and the asset class is about tobe closed out. The company's tax rate is 30% and its cost of capital is 12%. What is the Present Value of the tax shield lost due to the Undepreciated Capital Cost (UCC) in this case?

A) -$245
B) -$401
C) -$311
D) -$104

Answer 2

-$104

Question 3

What is the minimum required rate of return on a lease from a leasing company that has a tax rateof 45%, and a capital structure that consists of 85%% long-term debt with a cost of 8% and 15%equity with a cost of 15%?

A) 4.98%
B) 8.03%
C) 6.65%
D) 9.05%

Answer 3

6.65%

Question 4

Which of a firm's rates listed below is the appropriate one to use to evaluate the lease-or-purchase question?

A) Its long-term after-tax rate of raising debt
B) Its short-term before-tax rate of interest
C) Its long-term before-tax rate of raising debt
D) Its long-term rate of return on equity

Question 5

Assets leased under___________leases generally have a usable life longer than the term of the lease.

A) operating
B) direct
C) financial
D) capital

Question 6

Baldwin Industries Limited has decided to acquire a machine, which will replace an existing piece of equipment. The company has the choice between leasing the new machine or purchasing it. The existing machine is currently worth $26 000, while the new machine would cost $225 000. With thenew machine installed, Baldwin would reduce its costs by $72 300 a year. The new machine would have a useful life of 10 years, qualify for a 10% Investment Tax Credit (ITC) and have a salvage value after ten years of$30 000. This type of machine qualifies for a 30% CCA rate. For a 10-year lease the annual payment is expected to be $33 777 with the first payment due upon signing the lease contract. Baldwin's cost of capital is 12%, tax rate is 35% and the cost of raising long-term debt is estimated at 9%. What is the Net Present Value of the lease? Round your final answer to the nearest dollar.

A) $1 582
B) -$2 725
C) $2 694
D) -$1 033

Question 7

If the present value of the cost of leasing equals the present value of purchasing the asset, the annual lease rate (payment) is set so that the lessor would earn a rate of return on the lease that is

A) greater than the lessor's cost of capital
B) less than the lessor's cost of capital
C) impossible to compare to the lessor's cost of capital
D) equal to the lessor's cost of capital

Question 8

Disadvantages of leasing from the lessee's perspective include all of the following EXCEPT

A) the return to the lessor is quite high
B) under a financial lease, an asset may subsequently become obsolete.
C) leasing provides 100% financing
D) prohibition on leasehold improvements.

Question 9

Max Jordan Incorporated has $255 780 in total assets, $80 000 in equity and $175 780 in liabilities.The company is considering a lease with $12 242 in annual lease payments for 6 years. The firstlease payment is due upon signing the lease contract. The company's tax rate is 30% and its borrowing rate is 6.5%. The lessor's implied discount rate is 6.85% and the cost of the asset is $98776. Assuming the lease contract is signed, what is the company's total assets on Day 1 of the lease agreement?

A) $315 044
B) $329 232
C) $318 821
D) $321 689

Question 10

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

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

Question 11

Carpinelli Foods Limited is considering a leasing arrangement to acquire new processingequipment. Carpinelli's before-tax short-term borrowing rate is 5%, its before-tax long-termborrowing rate is 8%, its tax rate is 30% and the lessor's implied discount rate is 6%. What is the rateCarpinelli should use in its analysis of the lease-or-purchase issue?

A) 5%
B) 6%
C) 5.6%
D) 8%

Question 12

The Canadian Institute of Chartered Accountants requires explicit disclosure of obligation on the firm's balance sheet. For this type of lease, the present value for all of its paymentsis shown as an asset and the total lease payment obligation is included as a liability on the firm's balance sheet.

A) a sale-leaseback
B) an operating lease
C) a capital lease
D) a leveraged lease

Question 13

A company with a tax rate of 38% is planning to acquire a $1 125 000 asset that has a 30% CCA rate. The company may purchase the asset or lease it. The cost of borrowing is 12%. The prospectivelessor has a 46% tax rate and a 5.5% 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?

A) The value to the lessor is 143% of the value to the lessee
B) The value to the lessee is 139% of the value to the lessor
C) The value to the lessee is 113% of the value to the lessor
D) The value to the lessor is 129% of the value to the lessor

Question 14

From the lessee's point of view, if the Net Present Value of a lease equals zero, then...

A) ...the lessee would be paying the lowest payments possible while the lessor gets a return that just covers the cost of capital
B) ...the lessor is charging the maximum annual lease rate (payment) possible, and the lessee would be better off purchasing the asset
C) ...there is nothing to gain from the lease, and it is preferable to purchase the asset
D) ...the cost of leasing equals the cost of purchasing the asset

Question 15

Zimco Limited, a market research company in Vancouver, is considering acquiring new computers worth about $10 000 to replace outdated ones. If Zimco ends up leasing these computers, what type of lease would the company most likely use?

A) A sale-leaseback arrangement
B) An operating lease
C) A financial lease
D) A leveraged lease

Question 16

Assume you have just calculated the present value of the tax shield from CCA for a lessee to be $21552. If the tax rate you use in this calculation was increased by 10% (not 10 percentage points), howwould the present value of the tax shield from CCA change?

A) Increase by 10%
B) Increase by more than 10%
C) Decrease by more than 10%
D) Decrease by 10%

Question 17

Kelvin Limited, a manufacturing company in Regina, is considering acquiring a piece of land on which to build its new robotics-based production facility, all with a combined market value of $6500 000. If Kelvin ends up financing the acquisition with a lease, SaskLease Limited has limited its involvement to$1 300 000 while a bank is willing to lend Kelvin the remaining $5 200 000. What type of lease would this arrangement imply?

A) A sale-leaseback arrangement
B) A direct financial lease
C) An operating lease
D) A leveraged lease

Question 18

Which one of the following conditions in an apparent leasing contract may make Canada RevenueAgency (CRA) rule the contract to actually be a conditional sales arrangement:

A) The lessor may sell the asset to a third party at the end of the lease
B) The lessee has the option to buy the asset at fair market value at end of the lease
C) The lessor retains ownership of the asset at the end of the lease
D) The lessee automatically receives ownership of the asset at any time in the leasing period, including at the end of the lease.

Question 19

Which of the following assets is eligible for the investment tax credit (ITC)?

A) An industrial robot used by a auto company in Oshawa, Ontario
B) A truck used by a logging company in British Columbia
C) A harvesting machine used by a farm corporation in Prince Edward Island
D) Drilling equipment used by an oil and gas company headquartered in Calgary, Alberta

Question 20

What would be impact of the lessor and the lessee having the same tax rate and the same discountrate?

A) There would be no leasing arrangement
B) The lessor would lose from the lease and the lessee would win
C) The lessor would win from the lease and the lessee would lose
D) The lessor and the lessee would share the benefits from the lease equally

Question 21

Why is the salvage value of an asset not included in the calculation of the present value of a lease?

A) A leased asset always has salvage value of $0
B) It is the same whether the asset is leased or purchased
C) The salvage value would not be considered a cash flow
D) The salvage value has to be estimated, and only cash flows whose values are known with certainty are included

Question 22

When is the Investment Tax Credit entered as a benefit in a lease-or-purchase analysis?

A) When the alternative is to lease the asset
B) When the alternative is to purchase the asset
C) In both alternatives, regardless or whether the asset is leased or purchased
D) It is not entered in this type of analysis at all

Question 23

Zyllane Distributors has decided to acquire a machine, which will replace an existing piece ofequipment. The company has the choice between leasing the new machine or purchasing it. Theexisting machine is currently worth $15 000, while the new machine would cost $352 652. With the new machine installed, Zyllane would reduce its costs by $44 800 a year. The new machine would have a useful life of 12 years, qualify for a 10% Investment Tax Credit (ITC) and have a salvage value after 12 years of $50 000. This type of machine qualifies for a 30% CCA rate. For a 10-year lease the annual payment is expected to be $39 566 with the first payment due upon signing the lease contract. Zyllane's cost of capital is 8%, tax rate is 40% and the cost of raising long-term debt is estimated at 9%. What is the Net Present Value of the lease? Round your final answer to the nearest dollar.

A) -$23 030
B) -$18 653
C) -$27 363
D) -$20 027

Question 24

Who assumes the risk of a leased asset's salvage value?

A) Neither the lessee nor the lessor assumes this type of risk since the salvage value is known with certainty
B) The lessee
C) The lessor
D) The lessee and the lessor share the risk equally

Question 25

Pharma Support Limited is considering the lease of new computers from IT Leasing Limited. The computers cost $65 377 and have an estimated economic life of 3 years. The CCA rate is 45% and Pharma Support has a borrowing rate of 12% and a cost of capital of 10%. IT Leasing's borrowing rate is 8% and its cost of capital is 6%. Both companies have a tax rate of 30%. What is the value of the tax shield for IT Leasing?

A) $15 318
B) $16 816
C) $13 984
D) $12 077

Question 26

If the present value of the cost of purchasing an asset exceeds the present value of leasing the asset, the Net Present Value of the lease will be

A) Undetermined
B) Zero
C) Negative
D) Positive

Question 27

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

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

Question 28

Assume you have calculated the present value of the tax shield from CCA for a lessor. If the lessor's cost of capital used in this calculation was reduced, how would the present value of the tax shield from CCA change?

A) It would increase
B) It would decrease
C) It would not be affected
D) Cannot be determined with the information provided

Question 29

Island Tool and Dye Limited is a Prince Edward Island based manufacturing company considering acquiring new machinery worth $25 956. Island Tool and Dye may purchase the equipment from their supplier or lease it from Town and Country Leasing. The machinery's estimated salvage value after 8 years is estimated at $2 600. Island Tool and Dye's tax rate is 35%, before-tax borrowing rate10%, and the CCA rate is 20%. Keeping in mind that Island Tool and Dye is eligible for the federalInvestment Tax Credit (ITC), what is the present value of the company's cost of purchasing theequipment? Round your final answer to the nearest dollar.

A) $15 843
B) $18 115
C) $16 510
D) $17 290

Question 30

Belfor Manufacturing Limited has $878 010 in total assets, $272 555 in equity and $605 455 inliabilities. The company is considering a lease with $40 776 in annual lease payments for 6 years.The first lease payment is due upon signing the lease contract. The company's tax rate is 33% and its borrowing rate is 6%. The lessor's implied discount rate is 6.85%, the cost of the asset is $238 926 and the asset's economic life is estimated at 8 years. Which of the following statements about Belfor's considered lease is correct?

A) On the day the lease is signed, the capitalized value of the lease would be $222 202 after rounding.
B) The lease should not be capitalized since the term of the lease is only 67% of the asset's economic life
C) The contract would be considered a conditional sales arrangement since the economic life of the asset is longer than the term of the lease.
D) This lease would not be considered a financial (capital) lease since the present value of the lease is less than 90% of the asset's fair market value.

Question 31

Which of the following is NOT one of the four elements in the Canadian Institute of CharteredAccountants (CICA) definition of a financial lease.

A) The lease term is equal to 75% or more of the estimated economic life of the property.
B) At the beginning of the lease, the present value of the lease payments is equal to 80% or more of the fair market value of the leased property.
C) The lease transfers ownership of the property to the lessee by the end of the lease term.
D) The lessee has an option to purchase the property at a bargain price, a price below the fair market value, when the lease expires.

Question 32

For which of the assets listed below would a financial lease typically be used?

A) A computer system
B) Office furniture
C) A delivery truck
D) A building

Question 33

Which of the following statements about the lease payments and tax savings related to a lease is correct?

A) The lease payments are an annuity due while the tax savings are an ordinary annuity
B) The lease payments as ell as the tax savings are an ordinary annuity
C) The lease payments are an ordinary annuity while the tax savings are an annuity due
D) The lease payments as well as the tax savings are an annuity due

Question 34

A ___________is normally initiated by a firm that needs funds for operations. An asset previously owned by a lessee is sold to the lessor.

A) leveraged lease
B) capital lease
C) sale-leaseback
D) direct lease

Question 35

Which of the following statements about the characteristics of an operating lease and a financiallease is correct?

A) An operating lease is typically used to acquire assets that have useful lives longer than the term of the lease, while financial leases are used to acquire assets with useful lives shorter than the term of the lease.
B) An operating lease is typically used to acquire assets that have useful lives shorter than the term of the lease, while financial leases are used to acquire assets with useful lives longer than the term f the lease.
C) An operating lease is typically used to acquire assets that have useful lives as long as the term of the lease, while financial leases are used to acquire assets with useful lives shorter than the term of the lease.
D) An operating lease is typically used to acquire assets that have useful lives shorter than the term of the lease, while financial leases are used to acquire assets with useful lives as long as the term of the lease.

Question 36

For which of the assets listed below would an operating lease typically be used?

A) A large and expensive piece of machinery
B) A building
C) A $20 000 computer system
D) Land

Question 37

A capital or capitalized lease is otherwise known as

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

Question 38

An asset with a purchase cost of $96 422 and a CCA rate of 40% has a market value of $4 000 at the end of its 10-year life. Assume this asset is the only asset in its class. Which of the following statements about this situation is correct?

A) There is a recapture of $2 704
B) There is a terminal loss of $2 467
C) There is a recapture of $2 133
D) There is a terminal loss of $1 736

Question 39

SynSerge Limited has decided to acquire a machine, which will replace an existing piece of equipment. The company has the choice between leasing the new machine or purchasing it. The existing machine is currently worth $30 000, while the new machine would cost $405 850. With the new machine installed, SynSerge would reduce its costs by $86 500 a year. The new machine would have a useful life of 10 years, qualify for a 10% Investment Tax Credit (ITC) and have a salvage value after ten years of $45 000. This type of machine qualifies for a 30% CCA rate. For a 10-year lease the annual payment is expected to be $42 000 with the first payment due upon signing the lease contract. SynSerge's cost of capital is 10%, tax rate is 30% and the cost of raising long-term debt is estimated at 12%. What is the Net Present Value of the lease? Round your final answer tothe nearest dollar.

A) $55 817
B) $65 352
C) $47 227
D) $63 109

Question 40

What is the impact on the lease payment charged by the lessor if maintenance and insurance costsare included in the payment?

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

Question 41

Which of the following correctly describes the impact of CCA being an accelerated tax deduction?

A) There is no impact on the timing of the deductions
B) The deduction is received evenly throughout the asset's life
C) More of the deduction is received earlier in the asset's life
D) More of the deduction is received later in the asset's life

Question 42

Which of the following statements about a recapture is correct?

A) A recapture occurs when an asset's tax value is less than its undepreciated capital cost at the end of the asset's useful life
B) A recapture occurs when an asset's tax value is greater than its market value at the end of the asset's useful life
C) A recapture occurs when an asset's tax value is less than its market value at the end of the asset's useful life
D) A recapture occurs when an asset's tax value is greater than its undepreciated capital cost at the end of the asset's useful life

Question 43

Marsden Travels Limited is considering a leasing arrangement to acquire new computers and office furniture. Marsden's before-tax short-term borrowing rate is 5.5%, its before-tax long-term borrowing rate is 7%, its tax rate is 35% and the lessor's implied discount rate is 6%. Which of the following rates should Marsden use in its analysis of the lease-or-purchase issue?

A) Its before-tax long-term borrowing rate
B) The lessor's implied discount rate
C) Its after-tax long-term borrowing rate
D) Its before-tax short-term borrowing rate

Question 44

Kelly's Restaurants has a balance sheet with $306 503 in total assets, $206 127 in debt and $154 376 in equity. The company is about to lease new equipment for a 5-year term at a rate of 6.25% and annual payments of $22 308. The equipment's useful life is 6 years. On the company's balance sheet, what will the amount of total assets be on the day the lease contract is signed?

A) $76 859
B) $306 503
C) $405 670
D) $99 167

Question 45

Advantages of leasing from the lessee's perspective include all of the following EXCEPT

A) 100% financing
B) the capability of effectively depreciating land.
C) the benefit of the salvage value at the end of the term of the lease reverts to the lessor.
D) the ability to avoid restrictive covenants that are normally part of a long-term loan.

Question 46

Colbert & Sons is planning to expand their operations and acquire new equipment at a cost of $111000. The manufacturer of the new equipment has offered to lease it to Colbert at an attractive rate.For a 5-year lease, which corresponds to the useful life of the new equipment, the annual lease payment would be $18 054 with the first payment due when the contract is signed. As an alternative, Colbert could borrow the $111 000 to finance the purchase of the new equipment. If so, the borrowing rate would be 8% for a 5-year loan with annual payments of $27 801. At the end of its useful life, the equipment could be sold at an estimated fair market value of $15 000. The new equipment would qualify for the investment tax credit (ITC) of 10% of the purchase cost. Colbert's cost of capital is 7% and their tax rate is 30%. The provincial government may give Colbert a grantof $20 000 if the company goes ahead with the expansion, since it is expected to create new jobs, butthis offer has not been confirmed. The CCA rate for the type of equipment considered is 20%.Which of the following statements best describes your recommendation to Colbert in this situation?

A) Go ahead with the expansion by purchasing the equipment with bank financing but only if you get the government grant
B) Go ahead with the expansion by leasing the equipment regardless of whether you get the government grant or not
C) Go ahead with the expansion by leasing the equipment but only if you get the government grant
D) Go ahead with the expansion by purchasing the equipment with bank financing whether you get the government grant or not

Question 47

The amount recorded on the firm's balance sheet to account for a capital lease is

A) not needed, since financial leases are a source of off balance sheet financing.
B) the present value of the lease payments over the remaining life of the lease.
C) the sum of the lease payments over the remaining life of the lease.
D) determined using Canada Customs and Revenue Agency tables.

Question 48

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?

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 49

___________leases are not cancelable and are generally used for leasing land, buildings, and largepieces of fixed equipment.

A) Serial
B) Direct
C) Operating
D) Financial

Question 50

Which of the following statements about a terminal loss is correct?

A) A terminal loss occurs when an asset's tax value is greater than its market value at the end of the asset's useful life
B) A terminal loss occurs when an asset's tax value is less than its undepreciated capital cost at the end of the asset's useful life
C) A terminal loss occurs when an asset's tax value is greater than its undepreciated capital cost at the end of the asset's useful life
D) A terminal loss occurs when an asset's tax value is less than its market value at the end of the asset's useful life

Question 51

What is normally the impact on the lease payment charged by the lessor if the asset is the only assetin its class?

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

Question 52

An asset with a purchase cost of $112 500 and a CCA rate of 20% has a market value of $7 500 at the end of its 12-year life. Assume this asset is the only asset in its class. Which of the following statements about this situation is correct?

A) There is a recapture of $5 111
B) There is a terminal loss of $6 054
C) There is a recapture of $2 218
D) There is a terminal loss of $3 372

Question 53

A company with a tax rate of 33% is planning to acquire a $75 000 asset that has a 20% CCA rate.The company may purchase the asset or lease it. The cost of borrowing is 12%. The prospectivelessor has a 45% 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?

A) The value to the lessor is the same as the value to the lessee
B) The value to the lessor is 145% of the value to the lessee
C) The value to the lessor is 125% of the value to the lessee
D) The value to the lessor is 45% of the value to the lessee

Question 54

A company with a tax rate of 25% is planning to acquire a $100 000 asset that has a 30% CCA rate.The company may purchase the asset or lease it. The cost of borrowing is 9%. The prospectivelessor has a 40% tax rate and a 6% 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?

A) The value to the lessee is 64% of the value to the lessor
B) The value to the lessee is 125% of the value to the lessor
C) The value to the lessor is 85% of the value to the lessee
D) The value to the lessor is 164% of the value to the lessee

Question 55

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

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 56

British Columbia Manufacturing (BCM) Limited is planning to expand their operations and acquire new equipment at a cost of $68 000. The manufacturer of the new equipment has offered to lease it to BCM at an attractive rate. For a 7-year lease, which corresponds to the useful life of the new equipment, the annual lease payment would be $10 186 with the first payment due when the contract is signed. As an alternative, BCM could borrow the $68 000 to finance the purchase of the new equipment. If so, the borrowing rate would be 10% for a 7-year loan with annual payments of$13 968. At the end of its useful life, the equipment could be sold at an estimated fair market valueof $5 000. The new equipment would qualify for the investment tax credit (ITC) of 10% of the purchase cost. BCM's cost of capital is 8% and their tax rate is 35%. The provincial government may give BCM a grant of $10 000 if the company goes ahead with the expansion, since it is expected tocreate new jobs, but this offer has not been confirmed. The CCA rate for the type of equipment considered is 20%. Which of the following statements best describes your recommendation to BCM in this situation?

A) Go ahead with the expansion by purchasing the equipment with bank financing whether you get the government grant or not
B) Go ahead with the expansion by leasing the equipment but only if you get the government grant
C) Go ahead with the expansion by leasing the equipment regardless of whether you get the government grant or not
D) Go ahead with the expansion by purchasing the equipment with bank financing but only if you get the government grant

Question 57

To which of the following companies would leasing be most beneficial:

A) Company D with a tax rate of 25% and a borrowing rate of 15%
B) Company B with a tax rate of 35% and a borrowing rate of 12%
C) Company C with a tax rate of 30% and a borrowing rate of 14%
D) Company A with a tax rate of 40% and a borrowing rate of 10%

Question 58

Which of the following statements about a recapture is correct?

A) In a lease-or-purchase analysis, a recapture will be a cost of purchasing
B) In a lease-or-purchase analysis, a recapture will be a cost of neither purchasing nor leasing
C) In a lease-or-purchase analysis, a recapture will be a cost of both purchasing and leasing
D) In a lease-or-purchase analysis, a recapture will be a cost of leasing

Question 59

Rufus Brewing Company is considering the lease of new office furniture from National LeasingLimited. The furniture costs $11 250 and has an estimated economic life 5 years. The CCA rate is20% and Rufus Brewinghas a borrowing rate of 9% and a cost of capital of 8%. National Leasing's borrowing rate is 8.5% and its cost of capital is 6.6%. Both companies have a tax rate of 35%. What is the value of the tax shield for Rufus Brewing?

A) $3 028
B) $3 369
C) $2 708
D) $2 932

Question 60

Which of the following statements about using the Net Present Value of the cost of leasing todetermine whether to lease or to purchase an asset is correct?

A) If the Net Present Value of the cost of leasing is positive the asset should purchased
B) If the Net Present Value of the cost of leasing is negative the asset should purchased
C) If the Net Present Value of the cost of leasing is zero the asset should leased
D) If the Net Present Value of the cost of leasing is zero the asset should purchased

Question 61

How will a recapture affect the present value of the cost of purchasing an asset?

A) Its impact cannot be determined with the information provided
B) It will increase it
C) It will have no impact on the present value
D) It will reduce it

Question 62

Assume you have analyzed the lease-or-purchase issue for a company. The present value of the cost of leasing is lower than the present value of purchasing the asset. In this situation, what recommendation would you give the company?

A) You need more information to settle the issue
B) Lease the asset
C) It doesn't matter whether they lease or purchase - the operating costs are the same
D) Purchase the asset

Question 63

A company with a tax rate of 31% is planning to acquire a $225 950 asset that has a 30% CCA rate.The company may purchase the asset or lease it. The cost of borrowing is 11%. The prospectivelessor has a 46% tax rate and a 6.3% 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?

A) The value to the lessee is 145% of the value to the lessor
B) The value to the lessor is 155% of the value to the lessee
C) The value to the lessor is 175% of the value to the lessee
D) The value to the lessee is 165% of the value to the lessor

Question 64

How is the effect of a recapture calculated in a lease-or-purchase analysis?

A) Recapture x CCA rate
B) Recapture x discount rate
C) Recapture x cost of borrowing rate
D) Recapture x tax rate

Question 65

Panorama Corporation has made an offer to Wideview Brothers to lease or purchase an asset that has a useful life of 6 years. The asset sells for $122 000 and has a CCA rate of 20%. The asset's expected salvage value is $16 000 at the end of its useful life. Panorama is willing to guarantee a6-year bank loan at a 8% interest rate, which is the best rate available, to cover the purchase price. As an alternative to a bank-financed purchase, Panorama would consider a 6-year lease of Wideview's asset. The annual lease payment would be $ 25 666, with the first payment due uponsigning the lease agreement. Wideview's analysis concludes that it makes economic sense to acquire the machinery. What is the present value of Panorama's leasing cost in this case?

A) $107 528
B) $111 181
C) $109 834
D) $113 556

Question 66

Kendore Electric Limited is about to enter into a lease with annual lease payments of $211 550 for a6 year term. The company's tax rate is 28% and its borrowing rate is 6%. The first lease payment isdue when the contract is signed. What is the present value of the after-tax cost of the lease forKendore? Round your final answer to the nearest dollar.

A) $1 144 926
B) $837 623
C) $883 581
D) $933 376

Question 67

Kendore Electric Limited is about to enter into a lease with annual lease payments of $211 550 for a6 year term. The lease is for two machines that will replace outdated ones. The company's tax rateis 28% and its borrowing rate is 6%. The first lease payment is due when the contract is signed. The machines cost$1 100 000 and have a useful life of 10 years. At the end of the lease term, the lessor retains ownership of the assets but the lessee may at that time purchase them at fair market value. Whattype of lease is this?

A) A financial lease
B) A leveraged lease
C) An operating lease
D) A sale-leaseback arrangement

Question 68

The consequences of missing a financial lease payment are___________ those of missing an interest or principal payment on debt.

A) more severe than
B) unrelated to
C) less severe than
D) the same as

Question 69

Valcourt Industries is considering a leasing arrangement to acquire new processing equipment.Valcourt's cost of capital is 10%, its before-tax long-term borrowing rate is 8%, its tax rate is 30%and the lessor's implied discount rate is 5%. What is the rate Valcourt should use to discount the salvage value of its existing equipment in a lease-or-purchase analysis?

A) 8%
B) 10%
C) 5.6%
D) 5%

Question 70

Swank Corporation has made an offer to Brink Manufacturing to lease or purchase machinery that has a useful life of 4 years. The asset sells for $55 000 and has a CCA rate of 20%. The machinery's expected salvage value is $6 000 at the end of its useful life. Swank is willing to guarantee a 4-year bank loan at a 9% interest rate, which is the best rate available, to cover the purchase price. As an alternative to a bank-financed purchase, Swank would consider a 4-year lease of Brink's machinery. The annual lease payment would be $ 12 750, with the first payment due upon signing the lease agreement. Brink Manufacturing's analysis concludes that it makes economic sense to acquire the machinery. Swank's cost of capital is 10% and its tax rate is 30%. Swank's cost of capital is 12% and its tax rate is 40%. What is the present value of Swank's purchasing cost in this case?

A) $44 369
B) $40 111
C) $39 866
D) $42 045

Question 71

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

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 72

The Canadian Institute of Chartered Accountants establishes requirements for the explicitdisclosure of certain types of lease obligations on the firm's balance sheet. To qualify as a capitallease, any of the following elements may be present EXCEPT

A) at the beginning of the lease, the present value of the lease payment is equal to 90 percent or more of the fair market value of the leased property.
B) the lease contains an option to purchase the property at a "bargain" price.
C) the lease term is less than 75 percent of the economic life of the property.
D) the lease transfers ownership of the property to the lessee by the end of the lease.

Question 73

In which of the following situations would maintenance and insurance cost be included in a lease-or-purchase analysis?

A) The lessor pays these costs
B) The lessor has an agreement with third party vendors who bill the the lessee for the maintenance and insurance of the leased asset
C) The lessee pays these costs
D) The lessee has an agreement with third party vendors and pays them for the maintenance and insurance of the leased asset

Question 74

Ventix Limited is about to enter into a lease with annual lease payments of $78 950 for a 4 year term. The company's tax rate is 32% and its borrowing rate is 7%. The first lease payment is due when the contract is signed. What is the present value of the tax shield on Ventix's lease payments? Round your final answer to the nearest dollar.

A) $85 575
B) $90 087
C) $101 056
D) $69 111

Question 75

Winnipeg Lake Cruisers wants to lease two new boats from MidWest Leasing. The cost of the boats is$2 100 000 and the boats have an expected life of 15 years, which is also the term of the financial lease. MidWest's cost of capital is 6% and its tax rate is 45%. The combined Present Value of the tax shield from CCA, the salvage and the tax shield lost due to salvage is $825,783. What is the minimum annual lease payment MidWest can set and earn its required rate of return?

A) $187 749
B) $201 432
C) $215 077
D) $167 055

Question 76

Which of the following statements about the tax shield benefits from the Capital Cost Allowance(CCA) is correct?

A) If the lessee's tax rate is less than the lessor's tax rate, then the tax shield benefits from CCA would be more valuable to the lessee than to the lessor
B) If the lessee's tax rate is less than the lessor's tax rate, then the tax shield benefits from CCA would be more valuable to the lessor than to the lessee
C) The tax shield benefits from CCA affect neither the lessee nor the lessor
D) The tax shield benefits from CCA would be equally valuable to the lessee and the lessor

Question 77

Which of the following statements correctly describes how leasing companies' debt-dominated capital structure impact their cost of borrowing?

A) The portion of debt does not affect the cost of capital
B) Large portion of debt reduced the cost of capital
C) More information is needed to describe the impact on the cost of capital
D) Large portion of debt increases the cost of capital

Question 78

Which of the following variables would have no impact on the lease payment a lessor would charge:

A) Asset becomes eligible for Investment Tax Credit (ITC)
B) Inclusion of maintenance and insurance
C) Charging a damage deposit
D) Asset is the only asset in its class

Question 79

An agreement between Zenbrand Foods and Bennett Leasing, with Zenbrand as the lessee andBennett as the lessor, contained the following conditions, among many:Zenbrand's annual lease payment was set at $10 755 for a term of 5 years. At the end of the lease term, the ownership of the leased asset would automatically be transferred to Zenbrand unless Zenbrand had already exercised the option to buy the asset from Bennett at fair market value during the lease term. Canada Revenue Agency ruled that the agreement was not a lease but a conditional sale arrangement. Which of the following reasons could have led Canada Revenue Agency to make such a ruling about this agreement?

A) The lessee automatically receives ownership of the asset at any time in the leasing period, including at the end of the lease.
B) The lessor retains ownership of the asset at the end of the lease
C) The lessee has the option to buy the asset at fair market value at end of the lease
D) The lessor may sell the asset to a third party at the end of the lease

Question 80

An asset with a purchase cost of $256 422 and a CCA rate of 30% has a market value of $31 000 at the end of its 8-year life. Assume this asset is the only asset in its class. Which of the following statements about this situation is correct?

A) There is a recapture of $5 357
B) There is a terminal loss of $4 729
C) There is a recapture of $3 372
D) There is a terminal loss of $7 253