Question 1

Leasing offers several potential advantages. All except which of the following are advantages?

Accepted Answer

C

Question 2

In the net advantage to leasing calculation, after-tax salvage value is discounted at the firm's ____.

Accepted Answer

The after-tax salvage value is discounted at the weighted (marginal) cost of capital in the net advantage to leasing calculation. This is because the salvage value represents the cash inflow at the end of the lease term, which should be discounted back to its present value using the firm's weighted average cost of capital.

Question 3

Disadvantages of leasing include all except which of the following?

Accepted Answer

Leasing typically increases a firm's liquidity by not requiring a large upfront capital expenditure, unlike purchasing.

Question 4

All except which of the following are attributes of operating leases?

Accepted Answer

Operating leases have lease periods that are usually shorter than the asset's economic life, so A is incorrect. B, C, and D are all attributes of operating leases.

Question 5

All except which of the following have been cited as advantages of leasing by small businesses?

Accepted Answer

Leasing often involves higher effective interest costs compared to traditional borrowing. The advantages of leasing for small businesses typically include less cash required upfront, fewer restrictive covenants, and quicker approvals, but not lower interest costs.

Question 6

Lease-buy analysis assumes that the alternative to leasing as the source of financing is ____.

Accepted Answer

Lease-buy analysis typically compares the cost of leasing to the cost of borrowing to buy the asset. This is because both options involve a financing cost, making borrowing to buy the most direct alternative to leasing.

Question 7

Leasing accounts for more than ____ percent of all business investment in equipment.

Accepted Answer

Leasing accounts for more than 25 percent of all business investment in equipment, offering flexibility and potential tax benefits to businesses.

Question 8

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

Accepted Answer

The lessor is the owner of the property in a lease arrangement. The lessee is the person or entity who is renting or leasing the property from the lessor. The equity trustee is not typically involved in a lease arrangement, and a lender may be involved in providing financing for the purchase of the property, but is not necessarily the owner of the property in a lease arrangement.

Question 9

In a(n) ____, the lessor receives the entire accelerated depreciation tax shield while making a relatively small equity investment.

Accepted Answer

In a leveraged lease, the lessor borrows a significant portion of the funds needed to purchase the asset, allowing for a smaller equity investment. The lessor then receives the accelerated depreciation tax shield, as well as other tax benefits, throughout the lease term. This type of lease is often used for large, expensive assets such as aircraft or heavy machinery.

Question 10

The contract period of an operating lease tends to ____.

Accepted Answer

An operating lease typically has a shorter contract period than the economic life of the asset. This allows the lessee to use the asset for its required period without having to worry about its residual value or disposal. It also allows the lessor to retain ownership of the asset and lease it out to another lessee after the current lease expires.

Question 11

All except which of the following are disadvantages of leasing?

Accepted Answer

C is incorrect because leasing typically involves lower maintenance charges for the lessee, as the responsibility for maintenance often falls on the lessor.

Question 12

All except which of the following are advantages of leasing?

Accepted Answer

Leasing often represents a higher cost than ownership in the long term because it includes interest or financing charges. Ownership might involve higher upfront costs, but over time, it can be less expensive than leasing.

Question 13

All except which of the following are true of financial leases?

Accepted Answer

Not all financial leases are leveraged leases, making statement D false. Statements A, B, and C are all true.

Question 14

The sale and leaseback is advantageous to the lessee because the lessee _____.

Accepted Answer

In a sale and leaseback transaction, the lessee sells their asset to the lessor and then leases it back. This allows the lessee to receive cash from the sale of the asset while still being able to use it through the lease. Therefore, option B is the correct answer. Option A is incorrect as the lessee can still use the asset through the lease. Option C is also incorrect as the lessor retains ownership of the property at the end of the lease. Option D is false as the lessee is responsible for paying the rent as well as taxes and insurance during the lease term.

Question 15

A primary difference between leveraged leases and other financial leases is that ____.

Accepted Answer

The primary difference between leveraged leases and other financial leases is that leveraged leases involve the use of nonrecourse debt. This means that in the case of default, the lender can only seize the leased asset and cannot pursue other assets of the lessee. This type of lease is commonly used for assets with long useful lives, such as real estate or large machinery.

Question 16

Normally, when a firm operates under the protection of a bankruptcy court, lease payments ____.

Accepted Answer

Lease payments must continue to be paid by lessors even when the firm is operating under protection of a bankruptcy court. This is because the lessors have a legal claim on the leased assets and the bankruptcy court recognizes this claim. However, the court can modify or terminate leases if it determines that doing so is in the best interest of the bankrupt firm or its creditors.

Question 17

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

Accepted Answer

A lease that includes a purchase option for a nominal sum at the end of the lease term is often viewed by the IRS as a purchase agreement rather than a true lease. This is because the nominal purchase option makes it highly likely that the lessee will buy the asset, effectively transferring the benefits and burdens of ownership during the lease term.

Question 18

Lessees with ____ are most likely to use leveraged leases for large transactions.

Accepted Answer

Lessees with low profits, large tax-loss carryforwards, and high amounts of tax-exempt income are likely to use leveraged leases to take advantage of tax benefits that they cannot fully utilize themselves.

Question 19

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

Accepted Answer

In the net advantage to leasing calculation, cash flows are typically discounted at the after-tax marginal cost of borrowing because leasing is a financing decision and the cost of borrowing reflects the opportunity cost of funds.

Question 20

A sale and leaseback agreement is ____.

Accepted Answer

A sale and leaseback agreement allows the lessee to sell an asset (such as real estate or machinery) to a lessor and then lease it back, providing liquidity for the lessee. It can be structured as an operating or finance lease, but the primary purpose is to generate cash for the lessee. It is commonly used in real estate financing, but can also be used for machinery or equipment.

Quiz 22: Lease and Intermediate Term Financing