Question 1

What are the possible limitations to the idea that the value of the firm is immune to leasing?

Accepted Answer

The answer of What are the possible limitations to the...

Question 2

A firm is considering leasing a printing machine.The lease lasts for 3 years.The lease calls for 3 payments of $4,000 per year with the first payment occurring immediately.The machine would cost $7,500 to buy and would be straight-line depreciated (tax purpose)to zero salvage value over 3 years.The firm can borrow at 5%, and has a corporate tax rate is 30%.What is the NPV of the lease?

Accepted Answer

First, let's calculate the cost of buying the machine:

Depreciation per year = (Cost - Salvage value) / Useful life = (7500 - 0) / 3 = 2500
Tax savings per year = Depreciation per year * Tax rate = 2500 * 0.3 = 750
After-tax cost of owning = Cost - Tax savings = 7500 - 750 = 6750

Now, let's calculate the cost of leasing:

Lease payments per year = 3 * 4000 = 12000
After-tax cost of leasing = Lease payments - Tax savings on lease payments = 12000 - (12000 * 0.3) = 8400

The NPV of the lease can be calculated as follows:
PV(outflows) = present value of lease payments = $8,400
PV(inflows) = present value of tax savings on lease payments and purchase = $750(PMT, 5%, 3 years) + $2,500(PMT, 5%, 3 years) = $2,837.69
NPV = PV(inflows) - PV(outflows) = $2,837.69 - $8,400 = -$5,562.31

Since the NPV of leasing is negative, it's not a good choice, and buying the machine is the better option. Therefore, the best choice is to buy the machine.

Question 3

Which of the following are reasons for leasing from the lessee's point of view?

Accepted Answer

Leasing from the lessee's point of view can provide lower borrowing cost compared to traditional financing methods, as well as offer convenience and flexibility with terms and payment structures. Additionally, some leases may include maintenance and repair services provided by the lessor, which can also be beneficial to the lessee.

Question 4

A company is given the option of entering into a five-year, $20,000 financial lease arrangement that calls for prepaid monthly payments based on a 5.0% lease rate, or borrowing $20,000 through a five-year loan that calls for end-of-month payments based on a 5.4% lending rate.Ignoring any tax consequences, what is the NPV of the lease?

Accepted Answer

The answer of A company is given the option of...

Question 5

You are the manager of a sales division, and are considering leasing a fleet of cars for your staff.You can buy the cars for $300,000 or you can lease them for 8 years at $60,000 per year with payments due at end of each year.The company has a tax rate of 40.0% and a CCA rate of 10.0% on vehicles.If the company buys the cars and finances the purchase with a loan, they will pay 7.0% in interest.Assume that after the term of the lease is over, the salvage value of the cars will be zero.What is the NPV of the lease, based on accelerated investment incentive for CCA in the first year?

Accepted Answer

The NPV of the lease is calculated by comparing the after-tax cost of leasing versus buying. The lease payments are tax-deductible, and the CCA provides tax shields when buying. The accelerated investment incentive allows for a higher CCA claim in the first year, affecting the NPV calculation.

Question 6

Which of the following is not a reason for leasing?

Accepted Answer

Leasing provides the lessee, not the lessor, with insurance against obsolescence. The lessor is the owner of the asset, while the lessee benefits from using the asset without the risks of ownership, including obsolescence.

Question 7

You are a bank manager and are evaluating the financial statements of one of your corporate clients.You notice the size of the balance sheet to be larger because of IFRS changes with respect to leasing.Does that mean the corporation is now worth more?

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The answer of You are a bank manager and are...

Question 8

Your company requires a new truck to expand its delivery range.The cost of this truck is $38,000.The life of this asset should be 6 years with a $5,500 salvage value.Inquiries to a few banks have shown that a loan for the full amount is available with a yearly interest payment of 14%.Another option is to add this asset to the lease you already have.The leasing company has told you it will purchase the truck and lease it to you for an initial payment of $8,300 and an annual payment of $8,300 at the beginning of each of the next 6 years (a total of 7 payments).The company's tax rate is 38%, and the CCA rate of the asset pool of the truck is 20% with half-year rule applicable in the first year.
a)Will you proceed with the lease or buy the asset?

Accepted Answer

The answer of Your company requires a new truck to...

Question 9

You are the manager of a sales division, and are considering leasing a fleet of cars for your staff.You can buy the cars for $300,000 or you can lease them for 8 years at $60,000 per year with payments due at end of each year.The company has a tax rate of 40.0% and a CCA rate of 10.0% on vehicles.If the company buys the cars and finances the purchase with a loan, they will pay 7.0% in interest.Assume that after the term of the lease is over, the salvage value of the cars will be zero.What is the NPV of the lease, based on half-year rule for CCA in the first year?

Accepted Answer

To calculate the NPV of the lease, we need to consider the cost of leasing versus buying, including tax savings from depreciation (CCA) and interest expenses. The half-year rule for CCA means that in the first year, only half of the CCA rate applies. However, without detailed calculations provided in the question, it's challenging to directly compute the NPV. The correct choice, based on the information given, involves understanding that leasing might avoid upfront costs and CCA calculations but incurs a steady expense, impacting NPV negatively when compared to potential benefits from buying, financing, and utilizing tax deductions over time. The negative NPV suggests that leasing is less advantageous financially compared to the alternative scenario, possibly due to the loss of tax benefits from depreciation and interest deductions over the lease term.

Question 10

The CFO of Alberta Country Record Company has decided to use leases because this will result in the firm reporting higher net income and lower debt ratios.He feels this will reduce the cost of debt for the firm thereby increasing the value of the firm.If the market is efficient then his statement

Accepted Answer

The CFO's statement is not a valid reason to use leases because in an efficient market, investors see through the accounting treatments and focus on the firm's cash flows and risks, which are unaffected by the decision to lease or buy. Therefore, the choice of leasing over buying, solely for the purpose of improving financial ratios, would not fool the market or reduce the cost of debt in an efficient market.

Question 11

The lease term is four years, while the economic life of the asset is five years.The annual lease payment is $10,000 at the beginning of each year, and the appropriate discount rate is 7.0%.There is no salvage value at the end of the lease.The lessee uses the straight-line depreciation method for both accounting and tax purposes.
a)Estimate the fair market value of the asset.
b)Estimate the change in NI, CFO, and CFF at the end of the first year if a firm decides to enter into the lease agreement.

Accepted Answer

The answer of The lease term is four years, while...

Question 12

Frank has just started his first business-a snow removal company.In order for his business to be successful, he will need three large industrial-strength snow blowers.Each snow blower will cost $30,000.Provide three advantages leasing offers this small business.

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The answer of Frank has just started his first business-a...

Question 13

Which one of the following can be associated with the cheap financing motivation of leasing?

Accepted Answer

All of the given options can be associated with the cheap financing motivation of leasing.

A) Interest rates are fixed for the period of the lease - This is beneficial for lessees as they know exactly how much they will have to pay each month, making it easier to budget.

B) No maintenance costs - In some cases, lessors may include maintenance costs in the lease agreement, which can save the lessee money in the long run.

C) Reduce risk of holding the asset - Leasing allows the lessee to use the asset without having to bear the risks associated with owning it, such as depreciation and obsolescence.

Question 14

All of the following are reasons for leasing except:

Accepted Answer

Some leases can be off-balance-sheet is a reason for leasing, not an exception. The question asks for the exception, which is not provided in the options.

Quiz 16: Leasing