A) Lease payments are a fixed obligation of the firm.
B) The risk of the lease payments is no greater than the risk of secured debt, so it is reasonable to discount the lease payments at the firm's secured borrowing rate.
C) If a firm purchases a piece of equipment, the expense is a capital expenditure. Therefore, the purchase price can be depreciated over time, generating a depreciation tax shield.
D) If the equipment is leased and the lease is a non-tax lease, there is no capital expenditure, but the lease payments are an operating expense.
F) A) and B)
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D
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A) By offering assets together with complementary services, lessors can achieve efficiency gains and offer attractive lease rates.
B) Assets leased under a true lease are afforded bankruptcy protection and cannot be seized in the event of default.
C) Because of the higher recovery value in the event of default, a lessor may be able to offer more attractive financing through the lease than an ordinary lender could.
D) Lessors often have efficiency advantages over lessees in maintaining or operating certain types of assets.
F) A) and B)
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Set calculator to BEG mode (An...View Answer
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A) 2.0
B) 1.5
C) 0.80
D) 0.66
F) All of the above
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A) $1.00-out lease
B) fixed price lease
C) fair market value lease
D) fair market value cap lease
F) B) and C)
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If the firm acquires the fleet through an operating lease, there is no change in the original balance sheet. The fleet is not listed as an asset and the lease is not view as a liability. The transaction is off-balance sheet and will be disclosed in a footnote. Therefore, Luther's balance sheet will look like:
11ea84dc_f4a5_a840_9a63_05866b68d939_TB1316_00_TB1316_00
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A) 2,114
B) 1,825
C) 2,030
D) 2,103
F) B) and C)
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A) Whether they appear on the balance sheet or not, lease commitments are liabilities for the firm.
B) For most large corporations, the amount of leverage the firm can obtain through a lease is unlikely to exceed the amount of leverage the firm can obtain through a loan.
C) Some companies may place limits on the dollar amounts a manager can invest over a certain period.
D) All of the above are reasons why reducing leverage through off-balance sheet financing is not a valid argument for leasing.
F) None of the above
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A) The decision to lease is often driven by real-world market imperfections related to leasing's accounting, tax, and legal treatment.
B) When publicly traded firms disclose leasing transactions in their financial statements, they must follow the recommendations of the Financial Accounting Standards Board (FASB) .
C) In its Statement of Financial Accounting Standards No. 13 (FAS13) , the FASB provides specific criteria that distinguish a true tax lease from a nontax lease.
D) The categories used to report leases on the financial statements affect the values of assets on the balance sheet, but they have no direct effect on the cash flows that result from a leasing transaction.
F) A) and B)
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A) tax differences
B) reduced resale costs
C) efficiency gains from specialization
D) All of the above are valid arguments for leasing.
F) All of the above
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A) They are also called a finance leases.
B) The lease is viewed as a rental for accounting purposes.
C) The lessee reports the entire lease payment as an operating expense.
D) They are disclosed in the footnotes of the lessee's financial statements.
F) None of the above
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A) If a firm only needs to use the asset for a short time, it is probably less costly to lease it than to buy and resell the asset.
B) While owners of assets are likely to resell them only if the assets are "lemons," a short-term lease can commit the user of an asset to return it regardless of its quality. In this way leases can help mitigate the adverse selection problem in the used goods market.
C) Car dealerships are in a better position to sell a used car at the end of a lease than a consumer is.
D) If the asset's tax depreciation deductions are faster than its lease payments, there are tax gains from a true tax lease if the lessor is in a lower tax bracket than the lessee.
F) C) and D)
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A) $74,890.28
B) $1,749,890.28
C) $3,487,027.19
D) $2,367,559.51
F) None of the above
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B
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A) The property may be acquired at the fair market value of the asset at the time when the option may be exercised.
B) Some portion of the lease payments is specifically designated as interest or its equivalent.
C) The lessee receives ownership of the asset on completion of all lease payments.
D) The total amount that the lessee is required to pay for a relatively short period of use constitutes an inordinately large proportion of the total value of the asset.
F) A) and C)
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A) In a leveraged lease the lessor borrows from a bank or other lender to obtain the initial capital for the purchase, using the lease payments to pay interest and principal on the loan.
B) In some circumstances, the lessor is not an independent company but rather a separate business partnership, called a special-purpose entity (SPE) , which is created by the lessor for the sole purpose of obtaining the lease.
C) In a direct lease, the lessor is not the manufacturer, but is often an independent company that specializes in purchasing assets and leasing them to customers.
D) SPEs are commonly used in synthetic leases, which are designed to obtain specific accounting and tax treatment.
F) None of the above
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A) Because capital leases increase the apparent leverage on the firm's balance sheet, firms sometimes prefer to have a lease categorized as an operating lease to keep it off the balance sheet.
B) The firm does not report the present value of the future lease payments as a liability on the balance sheet.
C) The asset acquired is listed on the lessee's balance sheet, and the lessee incurs depreciation expenses for the asset.
D) They are viewed as an acquisition for accounting purposes.
F) C) and D)
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A) A lease is a contract between two parties: the lessee and the lessor.
B) Most leases involve little or no upfront payment.
C) The lessee is the owner of the asset, who is entitled to the lease payments in exchange for lending the asset.
D) At the end of the contract term, the lease specifies who will retain ownership of the asset and at what terms.
F) A) and C)
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A) In a nontax lease, the lessee can deduct the interest portion of the lease payments as an interest expense.
B) In a true tax lease, the lease payments are treated as revenue for the lessor.
C) In a true tax lease, the lessee receives the depreciation deductions associated with the ownership of the asset.
D) The IRS separates leases into two broad categories: true tax leases and nontax leases.
F) A) and B)
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A) fair market value cap lease
B) fair market value lease
C) $1.00-out lease
D) fixed price lease
F) A) and B)
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