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Exam 15: Lease Financing

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Question 21

True/False

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The full amount of a lease payment is tax deductible provided the contract qualifies as a true lease under CRA guidelines.

A) True
B) False

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Question 22

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What will heavy use of off-balance sheet lease financing tend to do?

A) make a company appear more risky than it actually is because its stated debt ratio will be increased
B) make a company appear less risky than it actually is because its stated debt ratio will appear lower
C) affect a company's cash flows but not its degree of risk
D) affect the lessee's cash flows but only due to tax effects

E) A) and B)
F) None of the above

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Question 23

Multiple Choice

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Under which circumstances will a lessor likely charge higher lease rates?

Consider the following information: original investment = $3,500,PV of CCA tax shield = $1,850,PV of after-tax lease payments = $2,000.What is the NAL?

Consider the following information: original investment = $5,000,PV of CCA tax shield = $3,500,PV of after-tax lease payments = $1,900.What is the NAL?

Consider the following information: original investment = $20,000,PV of CCA tax shield = $10,000,PV of after-tax lease payments = $15,900.What is the NAL?

A leveraged lease is more risky from the lessee's standpoint than an unleveraged lease.

In a synthetic lease,a special purpose entity (SPE) is set up by a corporation that wants to acquire the use of an asset.The SPE borrows up to 97% of its capital,uses its funds to buy the asset,and then leases it to the sponsoring corporation on a short-term basis.This keeps both the asset and the debt off the sponsoring company's books.

By entering into a lease,the lessee incurs an opportunity cost equal to the foregone CCA tax shield provided by the CCA of the asset.

If a leased asset has a negative residual value,for example,as a result of a statutory requirement to dispose of an asset in an environmentally sound manner,the lessee of the asset could reasonably expect to pay a lower lease rate because the asset does not have a positive residual value.

A fully taxable recapture exists if the lease provides the lessee with an option to purchase the asset at a bargain price.

Which of the following is NOT a typical design of a synthetic lease?

A lease has big impacts on the balance sheet,not the income statement.

From the lessee viewpoint,the riskiness of the cash flows,with the possible exception of the residual value,is about the same as which of the following?

Under a sale and leaseback arrangement,the seller of the leased property is the lessee and the buyer is the lessor.

Consider the following information: original investment = $1,900,PV of CCA tax shield = $1,000,PV of after-tax lease payments = $900.What is the NAL?

Which of the following statements is true?

Leasing is typically a financing decision and not a capital budgeting decision.Thus,the availability of lease financing cannot affect the size of the capital budget.

Which type of terms are often included in operating leases?

Consider the following information: original investment = $2,500,PV of CCA tax shield = $850,PV of after-tax lease payments = $1,700.What is the NAL?