Question 1

Which of the following factors does NOT represent an effect of corporate real estate ownership on corporate financial statements?

Accepted Answer

The corporation's overall debt ratio may be increased, not reduced, because property is carried at book value but financed at market value, which can lead to higher liabilities.

Question 2

Which of the following could be affected,if a corporation acquired a parcel of real estate?

Accepted Answer

All of the listed options could be affected if a corporation acquired a parcel of real estate.

A) Earnings per share ratio could be affected if the real estate acquisition results in increased debt or capital expenses, which could ultimately impact the company's profitability and thereby affect the earnings per share ratio.

B) Corporate liquidity could be affected if the company has to use a significant portion of its cash reserves to finance the real estate acquisition, thereby reducing the amount of liquid assets available to the company in the short term.

C) Corporate risk could be affected if the real estate acquisition exposes the company to additional market or industry risks, such as changes in property values, unexpected operating expenses, or regulatory changes.

Question 3

The residual value at the end of the holding period should be based on the market value of the real estate and not the book value.

Accepted Answer

The residual value, which represents the estimated value of the real estate at the end of the holding period, should reflect the market value rather than the book value because the market value is a more accurate measure of the property's worth. The book value, which is based on the property's original cost minus depreciation, may not reflect changes in the real estate market, property improvements, or other factors that could impact the property value.

Question 4

A company sells an office building that has appreciated in value and subsequently leases the space.Which of the following scenarios represents an impact that sale-leasebacks may have on corporate financial statements?

Accepted Answer

When a company sells an office building that has appreciated in value, it may realize a gain on the sale. This gain will increase taxable income in the year of sale, resulting in higher taxes. However, if the company then leases the space back from the buyer, it will continue to have use of the building and may be able to deduct the lease payments as an expense, offsetting some of the increased taxable income. Therefore, choice B is the best answer.

Question 5

It is estimated that corporate users control as much as ___ percent of all commercial real estate.

Accepted Answer

According to a report from JLL, corporate users control approximately 75% of all commercial real estate.

Question 6

All other factors being equal,a company would prefer to own rather than lease under which of the following conditions?

Accepted Answer

Owning an asset, especially a specialized one like a research and development building, gives a company control over its use and modifications, which is crucial for specialized needs. Leasing might not offer the flexibility or customization needed for such specific purposes.

Question 7

Similar to decisions about owning or leasing equipment,the decision to own or lease a property is basically just a choice between two financing alternatives.

Accepted Answer

The answer of Similar to decisions about owning or leasing...

Question 8

Which of the following is FALSE,concerning operating leases?

Accepted Answer

Operating leases are not recorded as present value of lease on the balance sheet. Instead, they are recorded as periodic rental expenses on the income statement and do not have a direct impact on the balance sheet. Choice B is therefore true, as an operating lease does not affect the balance sheet except for disclosing it in the notes to the financial statements. Choice C is also true, as operating leases are typically shorter than the asset's life. Choice D is subjective and not necessarily true or false for all companies.

Question 9

Non-recourse debt,such as a mortgage on a specific property,typically has a lower rate than the unsecured debt of companies with high credit ratings.

Accepted Answer

Non-recourse debt often carries a higher interest rate than unsecured debt of companies with high credit ratings because the lender's only recourse in case of default is the collateral itself, which introduces a higher risk compared to unsecured debt backed by the full faith and credit of a company.

Question 10

Which of the following does NOT represent a potential benefit of selling and leasing back a property?

Accepted Answer

Selling and leasing back a property can provide a source of capital (A), can be used to return excess capital to investors (B), and can demonstrate the value of the real estate to the marketplace (C). However, it does not increase the firm's depreciation deductions as the property is no longer owned by the firm, and therefore cannot be depreciated.

Question 11

Which of the following is true for a corporation with a high credit rating considering owning versus leasing corporate real estate

Accepted Answer

A corporation with a high credit rating can typically issue corporate debt at a more favorable rate, making financing a purchase or construction of real estate more attractive. Leasing from someone with a lower credit rating may not be as advantageous due to higher lease rates or potential instability of the landlord.

Question 12

When doing a sale versus lease analysis,how should the residual value of the property be estimated?

Accepted Answer

When doing a sale versus lease analysis, the residual value of the property should be estimated as the market value of the real estate. This reflects the actual value the property may hold in the future if it were to be sold or used as collateral for financing. The other options, such as assuming it is worthless, setting it equal to the book value of the property, or assuming it is equal to the original purchase price, do not accurately reflect the potential value of the property in the future.

Question 13

The cash flows considered in a sale-leaseback analysis are:

Accepted Answer

The answer of The cash flows considered in a sale-leaseback...

Question 14

A company is planning to move to a larger office and is trying to decide if the new office should be owned or leased.Cash flows for owning versus leasing are estimated as follows.Assume that the cash flows from operations will remain level over a 10 year holding period.If purchased,the company will invest $385,000 in equity and finance the remainder with an interest-only loan that has a balloon payment due in year 10.The after-tax cash flow from sale of the property at the end of year 10 is expected to be $750,000.What is the incremental rate of return on equity to the company,if the property is owned instead of leased?

Accepted Answer

The answer of A company is planning to move to...

Question 15

Which of the following tax law changes has reduced the incentive for individuals to lease to corporations as a part of the Tax Reform Act of 1986?

Accepted Answer

The Tax Reform Act of 1986 imposed limitations on "passive" losses incurred by individuals, which reduced the tax benefits of leasing to corporations. This means that individuals cannot offset all of their income with losses from passive activities such as leasing to corporations. Thus, the incentive to lease to corporations was reduced.

Question 16

A company estimates that the incremental cost of owning a parcel of real estate vs.leasing will be 10%.The company expects a 12% rate of return on investments.Therefore real estate should be owned and not leased.

Accepted Answer

The answer of A company estimates that the incremental cost...

Question 17

An operating lease does not affect a corporate balance sheet.

Accepted Answer

An operating lease is considered off-balance sheet financing and therefore does not affect a company's balance sheet.

Question 18

The cash flow to be considered in a lease versus own analysis are:

Accepted Answer

Purchase price, difference in cash flow from operations over the holding period, and cash flow from sale are all cash flows that should be considered in a lease versus own analysis.

Question 19

In general,if a company assumes that the residual value at the end of the holding period is always equal to the book value,the decision to own versus lease will be biased towards owning.

Accepted Answer

The answer of In general,if a company assumes that the...

Question 20

Which of the following conditions will NOT cause a lease to be categorized as a capital lease?

Accepted Answer

The answer of Which of the following conditions will NOT...

Quiz 15: Financing Corporate Real Estate