Question 1

The following are sensible reasons for leasing except

Accepted Answer

C

Question 2

The FASB defines financial lease as leases that meet the following:
I.The lease agreement transfers ownership to the lessee before the lease expires.
II.The lessee can purchase the asset for a bargain price when the lease expires.
III.The lease lasts for at least 75% of the asset's estimated economic life.
IV.The present value of the lease payments is at least 90% of the asset's value

Accepted Answer

The FASB defines financial lease as leases that meet all four criteria mentioned in the options (I, II, III, IV). Therefore, only option C includes all four criteria and is the correct choice.

Question 3

The following are sensible reasons for leasing:
I.Maintenance is provided.
II.There is affirmation of lease cash flows during bankruptcy.
III.Leasing avoids capital expenditure controls.
IV.Short-term leases are convenient.

Accepted Answer

D

Question 4

If the after-tax lease payment per year is $17,000, calculate the before-tax lease payments if the marginal tax rate is 21 percent.

Accepted Answer

Let X be the before-tax lease payment per year.

After-tax lease payment = X * (1-tax rate)

$17,000 = X * (1-0.21)

$17,000 = X * 0.79

X = $21,519.62 (rounded to nearest cent)

Therefore, the before-tax lease payments are $21,519. 
Option C is the correct answer.

Question 5

Sale and lease-back arrangements are prevalent in

Accepted Answer

Sale and lease-back arrangements are commonly used in real estate. This allows for companies to sell their property to a buyer and then lease it back from them for a set period of time. This can provide companies with much-needed capital while allowing them to continue using the property for their business operations. While sale and lease-back arrangements can technically be used for any asset, they are most often seen in the real estate industry.

Question 6

The following are advantages to lessors over secured lenders if a lessee is under bankruptcy except:

Accepted Answer

Option C is the only disadvantage to the lessor in the context of a lessee under bankruptcy. If the lessee is able to renegotiate the lease, the lessor may be forced to accept lower lease payments, which would negatively impact their profitability. The other options are advantages to the lessor, as they allow them to either continue receiving lease payments or recover the leased asset.

Question 7

The following are sensible reasons for leasing:
I.Short-term leases are convenient.
II.Standardization leads to low administrative and transaction costs for the lessor.
III.Lease cancellation options are valuable.
IV.Tax shields can be used.

Accepted Answer

All four reasons provided are sensible for leasing: short-term convenience, standardization reducing costs, the value of cancellation options, and the utilization of tax shields.

Question 8

Which of the following is probably not a good reason for leasing instead of buying?

Accepted Answer

The answer of Which of the following is probably not...

Question 9

A lease payment can be thought of as

Accepted Answer

A lease payment is a fixed payment made periodically, usually monthly, by a lessee to a lessor for the use of an asset. It is an annuity due because payments start immediately upon signing the lease agreement.

Question 10

If the after-tax present value of buying equipment and using it for six years is $100,000, calculate the break-even after-tax yearly lease payment (seven payments)using a 7 percent real discount rate. (Assume that lease payments are made at the beginning of the year and zero inflation.)

Accepted Answer

To calculate the break-even after-tax yearly lease payment, we need to find the annuity payment that would yield an after-tax present value of $100,000 over seven payments. We can use the following formula to calculate the annuity payment:

PV = PMT x ((1 - (1 + r)-n)/r) x (1 - t)

where PV is the present value of the lease payments, PMT is the lease payment, r is the real discount rate, n is the number of payments, and t is the tax rate.

Plugging in the given values, we get:

$100,000 = PMT x ((1 - (1 + 0.07)-7)/0.07) x (1 - 0)
$100,000 = PMT x 4.9476
PMT = $20,235.47

This is the before-tax lease payment. To find the after-tax payment, we need to multiply it by (1 - t):

After-tax lease payment = $20,235.47 x (1 - 0.3) = $14,164.83

Rounding this to the nearest dollar, we get $14,286 as the break-even after-tax yearly lease payment. Therefore, the best choice is B.

Question 11

Which of the following motivations are dubious reasons for leasing?
I.Leasing avoids capital expenditure controls.
II.Leasing preserves capital.
III.Leasing can make the firm's balance sheet and income statement look better by increasing book income or decreasing book assets or both.
IV.Tax shields can be used.

Accepted Answer

Reasons I, II, and III are all considered to be dubious reasons for leasing. Leasing should not be used solely to avoid capital expenditure controls or to artificially make the balance sheet or income statement look better. While tax shields can be a legitimate reason for leasing, it should not be the only reason for doing so. Preserving capital is a valid reason for leasing, but it should not be the primary motivation, as the long-term cost of leasing may outweigh the benefits of preserving capital in the short-term.

Question 12

If annual lease payments for a firm are $26,000, calculate the annual tax shield of these payments, given that the marginal tax rate is 21 percent.

Accepted Answer

The tax shield is calculated as the lease payment multiplied by the marginal tax rate. Therefore, the annual tax shield is 26,000 x 0.21 = $5,460.

Question 13

Leveraged leases are a form of

Accepted Answer

Leveraged leases are a type of financial leases where the lessor borrows a significant portion of the funds necessary to purchase the asset being leased, and then repays the borrowed funds with the lease payments received from the lessee. This type of lease can provide tax benefits for the lessor and possibly lower lease payments for the lessee.

Question 14

If the lessor borrows most of the purchase price of a leased asset, the lease is called a

Accepted Answer

A lease where the lessor borrows most of the purchase price of the asset is known as a leveraged lease. In a leveraged lease, the lessor borrows a significant portion of the purchase price and the asset serves as security for the loan. The lease payments made by the lessee are used by the lessor to pay off the loan, and the lessor retains ownership of the asset during the lease term.

Question 15

Which of the following is not a financial lease?

Accepted Answer

An operating lease is not a financial lease. Financial leases are long-term leases where the lessee takes on most of the risks and rewards of ownership, while operating leases are typically short-term leases where the lessor retains most of the risks and rewards of ownership. A direct lease, sale-and-leaseback, and other long-term leases are typically considered financial leases.

Question 16

In a lease arrangement, the owner of the asset is the

Accepted Answer

The lessor is the owner of the asset and the party who leases it to the lessee in exchange for regular payments. The lessee is the user of the asset who pays the lessor for its use.

Question 17

In a lease arrangement, the user of the asset is the

Accepted Answer

The user of the asset in a lease arrangement is called the lessee. The lessor is the owner of the asset who allows the lessee to use it in exchange for regular lease payments. Borrower and lender are more typically associated with loans, not leases.

Question 18

If the depreciation is $20,000 and the marginal tax rate is 21 percent, calculate the annual depreciation tax shield.

Accepted Answer

The annual depreciation tax shield is calculated as follows:

Depreciation Tax Shield = Depreciation x Marginal Tax Rate
= $20,000 x 0.21
= $4,200

Therefore, the correct answer is C.

Question 19

Firm X sold its office building and used the proceeds to improve its financial position. The firm then leased the building back in order to continue to use the facility. This is an example of a(n)

Accepted Answer

The situation described is a classic example of a sale and lease-back transaction, where a company sells an asset (such as a building) and then leases it back from the buyer. This helps the company to free up cash from the sale, while still being able to use the asset as though it had not been sold. It is commonly used as a financing strategy, and can also offer tax advantages.

Question 20

Which of the following statements is not true?
I.The lessee does not have to buy the equipment.
II.The lessee is responsible for making the lease payments.
III.Lease payments are not tax-deductible.
IV.The lessee may give up the depreciation tax shield.

Accepted Answer

III is not true because lease payments are often tax-deductible for the lessee, which is one of the financial benefits of leasing equipment.

Quiz 25: Leasing