39 Questions
In a lease arrangement, the owner of the asset is:
the lessor.
In a lease arrangement, the user of the asset is:
the lessee.
Which of the following would not be a characteristic of a financial lease?
They usually require the lessor to maintain and insure the leased assets.
An independent leasing company supplies _______ leases versus the manufacturer who supplies _______ leases.
direct; sales-type
The city of Oakville sold some buildings and used the proceeds to improve its financial position. The city then leased the buildings back in order to continue to use these facilities. This is an example of
a sale and leaseback.
If the lessor borrows much of the purchase price of a leased asset, the lease is called:
a leveraged lease.
An operating lease's primary characteristics are:
not fully amortized, lessor maintains equipment and there is a cancellation clause.
Operating leases:
must be disclosed in the lessee's annual report.
The Canadian University sold medical equipment and used the proceeds to improve its financial position. The University then leased the equipment back in order to continue to use these facilities. This is an example of:
a sale and leaseback.
A financial lease has which as its primary characteristics:
is fully amortized, the lessee maintains equipment and there is a renewal clause and a nocancellation clause.
An advantage of leasing is that the lessee does not own the asset and can cancel:
only operating leases.
For accounting purposes, which of the following conditions would not automatically cause a lease to be a financial lease?
The lessee can purchase the asset for its fair market value at the end of the lease.
Capital leases would show up on the balance sheet of the firm in which manner for a six-year machinery lease, worth $700,000:
Asset-Assets under capital lease $700,000; Liabilities-Obligations under capital lease $700,000
Prior to CICA 3065, "Accounting for Leases", lease activity was only reported in financial footnotes. This off-balance-sheet-financing made firms with:
financial leases appear to be financially stronger than if the leases were on-balance-sheetfinancing.
The reason the CRA is most concerned about lease contracts is:
that leases can be set up solely to avoid taxes.
A lease with high payments early in its life which then decline to termination would:
be evidence of tax avoidance and not acceptable to the CRA.
The appropriate discount rate for valuing a financial lease is:
the after-tax cost of secured borrowing.
Your firm is considering leasing a new robotic milling control system. The lease lasts for 5 years. The lease calls for 6 payments of $300,000 per year with the first payment occurring at lease inception. The system would cost $1,050,000 to buy and would be straight-line depreciated to a zero salvage value. The actual salvage value is zero. The firm can borrow at 8%, and the corporate tax rate is 34%. What is the appropriate discount rate for valuing the lease?
5.28%
Your firm is considering leasing a new robotic milling control system. The lease lasts for 5 years. The lease calls for 6 payments of $300,000 per year with the first payment occurring at lease inception. The system would cost $1,050,000 to buy and would be straight-line depreciated to a zero salvage value. The actual salvage value is zero. The firm can borrow at 8%, and the corporate tax rate is 34%. What is the after-tax cash flow from leasing in year 0?
-$852,000
Your firm is considering leasing a new robotic milling control system. The lease lasts for 5 years. The lease calls for 6 payments of $300,000 per year with the first payment occurring at lease inception. The system would cost $1,050,000 to buy and would be straight-line depreciated to a zero salvage value. The actual salvage value is zero. The firm can borrow at 8%, and the corporate tax rate is 34%. What is the after-tax cash flow in years 1 through 5?
$269,400
Your firm is considering leasing a new robotic milling control system. The lease lasts for 5 years. The lease calls for 6 payments of $300,000 per year with the first payment occurring at lease inception. The system would cost $1,050,000 to buy and would be straight-line depreciated to a zero salvage value. The actual salvage value is zero. The firm can borrow at 8%, and the corporate tax rate is 34%. What is the NPV of the lease?
$305,388
Your firm is considering leasing a new robotic milling control system. The lease lasts for 5 years. The lease calls for 6 payments of $300,000 per year with the first payment occurring at lease inception. The system would cost $1,050,000 to buy and would be straight-line depreciated to a zero salvage value. The actual salvage value is zero. The firm can borrow at 8%, and the corporate tax rate is 34%. What is the maximum lease payment that you would be willing to make?
$210,307
Your firm is considering leasing a radiographic x-ray machine. The lease lasts for 3 years. The lease calls for 4 payments of $25,000 per year with the first payment occurring immediately. The computer would cost $140,000 to buy and would be straight-line depreciated to a zero salvage value over 3 years. The actual salvage value is negligible. The firm can borrow at a rate of 12%. The corporate tax rate is 40%. This lease would be classified as a(n):
capital lease because the lease life is greater than 75% of the economic life.
Your firm is considering leasing a radiographic x-ray machine. The lease lasts for 3 years. The lease calls for 4 payments of $25,000 per year with the first payment occurring immediately. The computer would cost $140,000 to buy and would be straight-line depreciated to a zero salvage value over 3 years. The actual salvage value is negligible. The firm can borrow at a rate of 12%. The corporate tax rate is 40%. What is the after-tax cash flow from leasing relative to the after-tax cash flow from purchasing in years 1-3?
$33,667
Your firm is considering leasing a radiographic x-ray machine. The lease lasts for 3 years. The lease calls for 4 payments of $25,000 per year with the first payment occurring immediately. The computer would cost $140,000 to buy and would be straight-line depreciated to a zero salvage value over 3 years. The actual salvage value is negligible. The firm can borrow at a rate of 12%. The corporate tax rate is 40%. What is the after-tax cash flow from leasing relative to the after-tax cash flow from purchasing in year 0?
-$125,000
Your firm is considering leasing a radiographic x-ray machine. The lease lasts for 3 years. The lease calls for 4 payments of $25,000 per year with the first payment occurring immediately. The computer would cost $140,000 to buy and would be straight-line depreciated to a zero salvage value over 3 years. The actual salvage value is negligible. The firm can borrow at a rate of 12%. The corporate tax rate is 40%. What is the NPV of the lease relative to the purchase?
-$36,970
The WACC is not used in the lease versus purchase decision because:
the WACC was used in the decision to acquire the asset, this is only a financing decision.
The risk of cash flow associated with the lease payment and the depreciation shield are:
different for taxable firms and the depreciation shield should be discounted at a lower riskless rate.
Debt displacement is associated with leases because:
lease financing is all debt and causes an imbalance in the optimal debt to equity ratio which reduces future debt financing.
A financial lease is likely to be most beneficial to both parties when:
the lessor's tax rate is higher than the lessee's.
The price or lease payment, that the lessee sets as their bound, is known as:
the reservation payment, LMAX.
Your firm is considering leasing a new computer. The lease lasts for 9 years. The lease calls for 10 payments of $1,000 per year with the first payment occurring immediately. The computer would cost $7,650 to buy and would be straight-line depreciated to a zero salvage over 9 years. The actual salvage value is negligible because of technological obsolescence. The firm can borrow at a rate of 8%. The corporate tax rate is 30%. What is the after-tax cash flow from leasing in years 1-9?
$955
Your firm is considering leasing a new computer. The lease lasts for 9 years. The lease calls for 10 payments of $1,000 per year with the first payment occurring immediately. The computer would cost $7,650 to buy and would be straight-line depreciated to a zero salvage over 9 years. The actual salvage value is negligible because of technological obsolescence. The firm can borrow at a rate of 8%. The corporate tax rate is 30%. What is the after-tax cash flow from leasing in year 0?
-$6,950
Your firm is considering leasing a new computer. The lease lasts for 9 years. The lease calls for 10 payments of $1,000 per year with the first payment occurring immediately. The computer would cost $7,650 to buy and would be straight-line depreciated to a zero salvage over 9 years. The actual salvage value is negligible because of technological obsolescence. The firm can borrow at a rate of 8%. The corporate tax rate is 30%. What is the NPV of the lease?
-$339.78
Your firm is considering leasing a new computer. The lease lasts for 9 years. The lease calls for 10 payments of $1,000 per year with the first payment occurring immediately. The computer would cost $7,650 to buy and would be straight-line depreciated to a zero salvage over 9 years. The actual salvage value is negligible because of technological obsolescence. The firm can borrow at a rate of 8%. The corporate tax rate is 30%. What would the after-tax cash flow in year 9 be if the asset had a residual value of $500 (ignoring any possible risk differences)?
$1,305
Your firm is considering leasing a new computer. The lease lasts for 9 years. The lease calls for 10 payments of $1,000 per year with the first payment occurring immediately. The computer would cost $7,650 to buy and would be straight-line depreciated to a zero salvage over 9 years. The actual salvage value is negligible because of technological obsolescence. The firm can borrow at a rate of 8%. The corporate tax rate is 30%. This lease would be classified as a(n):
financial lease because the lease life is greater than 75% of the economic life.
Your firm is considering leasing a new computer. The lease lasts for 9 years. The lease calls for 10 payments of $1,000 per year with the first payment occurring immediately. The computer would cost $7,650 to buy and would be straight-line depreciated to a zero salvage over 9 years. The actual salvage value is negligible because of technological obsolescence. The firm can borrow at a rate of 8%. The corporate tax rate is 30%. What is the appropriate discount rate for valuing the lease?
5.60%
Your firm is considering leasing a new robotic milling control system. The lease lasts for 5 years. The lease calls for 6 payments of $300 thousand per year with the first payment occurring at lease inception. The black box would cost $1050 thousand to buy and would be straight-line depreciated to a zero salvage. The actual salvage value is zero. The firm can borrow at 8%, and the corporate tax rate is 34%. All answers are in thousands. What is the after-tax cash flow from leasing in year 0?
-$852
Your firm is considering leasing a new robotic milling control system. The lease lasts for 5 years. The lease calls for 6 payments of $300 thousand per year with the first payment occurring at lease inception. The black box would cost $1050 thousand to buy and would be straight-line depreciated to a zero salvage. The actual salvage value is zero. The firm can borrow at 8%, and the corporate tax rate is 34%. All answers are in thousands. What is the after-tax cash flow in years 1 through 5?
$269.40
Test your knowledge about lease arrangements with this quiz. Answer questions about the owner and user of the asset, characteristics of financial leases, types of leases, and related concepts.
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