Question 1

A firm may choose to lease if​

Accepted Answer

Leasing can be more advantageous for firms in lower tax brackets because they might not benefit as much from the tax deductions associated with depreciation expenses. Leasing allows these firms to avoid the need for depreciation and still gain access to the equipment or assets they need.

Question 2

If a term loan requires equal annual payments that pay the interest and retire the principal, that is similar to​

Accepted Answer

Mortgage payments also require equal annual payments that pay the interest and retire the principal. Lease payments do not necessarily retire the principal, dividend payments are payments to shareholders for holding stock, and compensating balances are requirements to maintain a certain level of deposits in a bank account.

Question 3

What is the repayment schedule for the first three years for a twenty‑year mortgage loan of $75,000 with a 12% rate of interest if the annual payment is $10,041.50? (This material was initially covered in Chapter 7, and the concept reappears in this chapter.)​

Accepted Answer

The answer of What is the repayment schedule for the...

Question 4

Capitalizing a lease​

Accepted Answer

Capitalizing a lease means treating it as a long-term debt instead of an operating expense, which increases the amount of debt on the company's balance sheet.

Question 5

​A firm could buy an asset for $20,000 by borrowing the funds at 10 percent for four years with interest paid annually and the entire loan repaid at maturity. The firm could lease the equipment for $5,800 a year including maintenance. If the firm does buy, maintenance will be $600 a year. The estimated after-tax salvage value is $1,250, and depreciation will be $5,000 annually. Construct projected cash outflows for each alternative for each year. Assume a 30 percent income tax rate. Is leasing the better alternative if the firm uses a cost of funds of 10 percent?

Accepted Answer

The answer of ​A firm could buy an asset for...

Question 6

If a lease is not capitalized,
1) the return on assets is overstated
2) the return on assets is understated
3) the use of financial leverage is overstated
4) the use of financial leverage is understated​

Accepted Answer

The answer of If a lease is not capitalized,
1) the...

Question 7

A financial lease is similar to an operating lease, since​

Accepted Answer

A financial lease is similar to an operating lease in that it is a long-term rental agreement for an asset. However, in a financial lease, the lessor (financing company) owns the asset and the lessee (firm) has an option to purchase the asset at the end of the lease term. This is unlike an operating lease, where the lessee returns the asset to the lessor at the end of the lease term.

Question 8

A firm could buy an asset for $10,000 by borrowing the funds at 12 percent for four years. Construct the payment schedule for this loan if equal, annual payments retire the loan and pay the interest.​

Accepted Answer

The answer of A firm could buy an asset for...

Question 9

A firm could lease the equipment in the previous question for $3,700 a year. If the firm purchased the equipment for $10,000, the maintenance expense will be $350 a year; depreciation is $2,500 annually, and the firm pays $250 to have the equipment removed. Construct projected annual cash outflows for each alternative. Assume a 25% income tax rate. Is leasing the better alternative if the firm uses 10 percent cost of funds?​

Accepted Answer

The answer of A firm could lease the equipment in...

Question 10

If a term loan requires equal annual payments that retire the loan and pay the interest, that is similar to​

Accepted Answer

Mortgage payments also require equal annual payments that retire the loan and pay the interest.

Question 11

Features of a term loan include
1) restrictive covenants
2) repayment schedules
3) dividend payments​

Accepted Answer

1) Restrictive covenants are included in a term loan to ensure that the borrower operates within certain guidelines or restrictions during the life of the loan. These covenants may include restrictions on the borrower's ability to take on additional debt, sell assets, or pursue other business activities that could negatively impact the lender's ability to recover their funds.

2) Repayment schedules are a key feature of any term loan. This outlines the timeline and structure of the loan payments, including the amount of each payment, the interest rate applied, and the total loan duration. This provides clarity and predictability for both the borrower and the lender.

3) Dividend payments are not typically a feature of a term loan, as they are a distribution of profits to shareholders rather than a repayment of debt. Therefore, Choice B and C are incorrect, and D is incomplete as it only includes repayment schedules without mentioning restrictive covenants.

Question 12

A financial lease is similar to an operating lease, since​

Accepted Answer

Both financial leases and operating leases provide the lessee with the use of an asset, but in a financial lease, the lessee is considered the owner of the asset for accounting and tax purposes.

Question 13

If a firm leases instead of borrowing, it
1) owns the asset
2) has the use of the asset
3) receives the depreciation expense
4) losses the asset's residual value​

Accepted Answer

When a firm leases an asset, it does not own the asset but has the right to use it, meaning it does not receive the depreciation expense (which is applicable to the owner) and loses any residual value since it must return the asset at the end of the lease term.

Question 14

In a sale and leaseback​

Accepted Answer

In a sale and leaseback, the lessee sells equipment to a lessor and then leases it back from the lessor. This allows the lessee to free up cash by selling the asset, while still retaining use of the asset through the lease agreement.

Quiz 27: Intermediate-Term Debt and Leasing

A firm may choose to lease if​

If a term loan requires equal annual payments that pay the interest and retire the principal, that is similar to​

What is the repayment schedule for the first three years for a twenty‑year mortgage loan of $75,000 with a 12% rate of interest if the annual payment is $10,041.50? (This material was initially covered in Chapter 7, and the concept reappears in this chapter.)​

Capitalizing a lease​

If a lease is not capitalized, 1) the return on assets is overstated 2) the return on assets is understated 3) the use of financial leverage is overstated 4) the use of financial leverage is understated​

A financial lease is similar to an operating lease, since​

A firm could buy an asset for $10,000 by borrowing the funds at 12 percent for four years. Construct the payment schedule for this loan if equal, annual payments retire the loan and pay the interest.​

If a term loan requires equal annual payments that retire the loan and pay the interest, that is similar to​

Features of a term loan include 1) restrictive covenants 2) repayment schedules 3) dividend payments​

A financial lease is similar to an operating lease, since​

If a firm leases instead of borrowing, it 1) owns the asset 2) has the use of the asset 3) receives the depreciation expense 4) losses the asset's residual value​

In a sale and leaseback​

A firm may choose to lease if

If a term loan requires equal annual payments that pay the interest and retire the principal, that is similar to

What is the repayment schedule for the first three years for a twenty‑year mortgage loan of $75,000 with a 12% rate of interest if the annual payment is $10,041.50? (This material was initially covered in Chapter 7, and the concept reappears in this chapter.)

Capitalizing a lease

If a lease is not capitalized, 1) the return on assets is overstated 2) the return on assets is understated 3) the use of financial leverage is overstated 4) the use of financial leverage is understated

A financial lease is similar to an operating lease, since

A firm could buy an asset for $10,000 by borrowing the funds at 12 percent for four years. Construct the payment schedule for this loan if equal, annual payments retire the loan and pay the interest.

If a term loan requires equal annual payments that retire the loan and pay the interest, that is similar to

Features of a term loan include 1) restrictive covenants 2) repayment schedules 3) dividend payments

A financial lease is similar to an operating lease, since

If a firm leases instead of borrowing, it 1) owns the asset 2) has the use of the asset 3) receives the depreciation expense 4) losses the asset's residual value

In a sale and leaseback