Question 1

Which one of these statements is correct concerning the lease versus buy decision?

Accepted Answer

A)   The lessor is primarily concerned with returning the asset at the end of the lease term without incurring any additional charges.
B)   The lessee is primarily concerned about the use of the asset.
C)   If Dell Computer became a lessor of its own computers it would be doing direct leasing.
D)   A ﬁrm should always purchase an asset rather than lease it if the asset has a positive salvage value.
E)   Dell Computer would be a captive ﬁnance company if it became a lessor of its own computers.F) B) and C)
G) C) and E)

Question 2

Which of the following is NOT required in order to calculate the net advantage to leasing (NAL) ?

Accepted Answer

A)   The depreciation tax shield.
B)   The cost of the leased asset.
C)   The lease payment.
D)   The lessee's cost of equity.
E)   The lessee's after-tax borrowing rate.F) B) and E)
G) C) and D)

Question 3

In a direct lease, the lessor is the end user of the asset.

Accepted Answer

A) True 
 B)False

Question 4

What is the present value of the depreciation tax shield?

Accepted Answer

A)   $23,560
B)   $21,187
C)   $27,622
D)   $56,869
E)   $89,365F) B) and D)
G) All of the above

Question 5

A ﬁrm that is very cyclical in nature and requires extra equipment only during its peak periods should consider leasing that equipment using a(n)  _____ lease.

Accepted Answer

A)   Operating.
B)   Tax-oriented.
C)   Sale and buyback.
D)   Leverage.
E)   Financial.F) A) and B)
G) A) and C)

Question 6

The CRA will disallow any lease that:

Accepted Answer

A)   Has a lease term in excess of three years.
B)   Has a term that is less than one-half of the economic life of the asset.
C)   Involves a lessee that has net operating losses.
D)   Appears to exist solely to avoid taxes.
E)   Reduces the combined tax obligations of the lessor and the lessee.F) All of the above
G) A) and E)

Question 7

R&S is considering either leasing or buying some new equipment. The lease payments would be $9,500 a year. The purchase price is $31,000. The equipment has a 3-year life after which it is
Expected to have a resale value of $4,500. Your ﬁrm uses straight-line depreciation, borrows
Money at 8.5 percent, and has a 35 percent tax rate. What is the after-tax salvage value of the
Equipment?

Accepted Answer

A)   $2,857
B)   $2,925
C)   $3,333
D)   $6,075
E)   $6,923F) B) and C)
G) None of the above

Question 8

Themost commonly cited reason for leasing is that __________________.

Accepted Answer

A)   it allows the lessee to exploit the deductibility of lease payments
B)   it reduces the uncertainty associated with the residual value of the leased asset
C)   it facilitates the circumvention of capital expenditure control systems
D)   it reduces the cost of equity
E)   transactions costs are usually lower for leasing than for buyingF) B) and E)
G) None of the above

Question 9

Leasing equipment due to a desire to avoid capitalization of the asset is considered an example of
leasing to reduce uncertainty.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following is the best deﬁnition of a lessor?

Accepted Answer

A)   A longer-term, fully amortized lease under which the lessee is responsible for upkeep. Usually not cancellable with-out penalty.
B)   The user of an asset in a leasing agreement. Lessee makes payments to lessor.
C)   The owner of an asset in a leasing agreement. Lessor receives payments from the lessee.
D)   A leveraged lease is a tax-oriented lease involving three parties: a lessee, a lessor, and a lender.
E)   The NPV of the decision to lease an asset instead of buying it.F) B) and C)
G) A) and E)

Question 11

Rosie's Kitchen needs some new commercial ovens. The purchase price is $56,000. The ovens will be worthless after 4 years. The ovens belong in a 30 percent CCA class and can be leased for
$16,500 a year. The ﬁrm can borrow money at 7.5 percent and has a 34 percent tax rate. What is the
Net advantage to leasing?

Accepted Answer

A)   -$2,423
B)   -$1,289
C)   -$532
D)   $532
E)   $1,289F) None of the above
G) B) and E)

Question 12

Knight Motors is considering either leasing or buying some new equipment. The lease payments would be $14,500 a year for 3 years. The purchase price is $52,000. The equipment has a 3-year
Life and then is expected to have a resale value of $12,000. Knight Motors uses straight-line
Depreciation, borrows money at 9 percent, and has a 35 percent tax rate. What is the net
Advantage to leasing?

Accepted Answer

A)   -$2,742
B)   -$2,212
C)   -$1,611
D)   $3,529
E)   $3,898F) B) and E)
G) C) and E)

Question 13

Lester's Gym wants to expand its facilities by obtaining $62,000 of new exercise equipment. The equipment will have a 3-year life and will be worthless after that time. The cost of borrowed funds is
9) 5 percent and the tax rate is 35 percent. The equipment can be leased for $22,500 a year. What
Is the amount of the depreciation tax shield in the second year if the equipment belongs in a 40
Percent CCA class?

Accepted Answer

A)   $5,402
B)   $5,589
C)   $6,606
D)   $6,944
E)   $7,275F) C) and D)
G) B) and C)

Question 14

The riskiness of leasing cash ﬂows is most similar to the lessee's _____________ cash ﬂows.

Accepted Answer

A)   Unit sales.
B)   Debt ﬁnancing.
C)   Employee labour cost.
D)   Common equity ﬁnancing.
E)   Net income.F) A) and E)
G) A) and C)

Question 15

An operating lease is deﬁned as a ______ lease under which the _____ is usually responsible for the maintenance, insurance, and taxes.

Accepted Answer

A)   Short-term; lessee
B)   Short-term; lessor
C)   Long-term; lessee
D)   Long-term; lessor
E)   Long-term; guarantorF) A) and D)
G) B) and E)

Question 16

Nason Farms is considering the purchase of a delivery truck costing $39,000. The truck will be used for 3 years and then it will be worthless. The ﬁnancing rate for the purchase is 8 percent and
The corporate tax rate is 35 percent. The ﬁrm uses straight-line depreciation. What is the break-even
Lease payment amount?

Accepted Answer

A)   $15,115
B)   $17,318
C)   $17,546
D)   $21,038
E)   $23,254F) D) and E)
G) A) and E)

Question 17

Provide a deﬁnition of a net advantage to leasing (NAL).

Accepted Answer

The NPV of the decis...

Question 18

A ﬁnancial lease is generally cancellable without penalty if the lessee provides 30 days advance
notice.

Accepted Answer

A) True 
 B)False

Question 19

The term of an operating lease is relatively short.

Accepted Answer

A) True 
 B)False

Question 20

Whistle Farms is considering either leasing or buying some new equipment. The lessor will charge $16,000 a year for a 3-year lease. The purchase price is $46,000. The equipment has a 3-year life
After which time it will be worthless. Whistle Farms uses straight-line depreciation, has a 35 percent
Tax rate, borrows money at 9 percent, and has suﬃcient tax loss carryovers to offset any potential
Taxable income the ﬁrm might have over the next ﬁve years. What is the net advantage to leasing?

Accepted Answer

A)   $3,574
B)   $4,919
C)   $5,499
D)   $6,283
E)   $6,479F) B) and E)
G) None of the above

Exam 22: Behavioral Finance: Implications for Financial Management

Correct Answer
verified

Correct Answer
verified

Which of the following is NOT required in order to calculate the net advantage to leasing (NAL) ?

Correct Answer
verified

Which of the following is the best deﬁnition of a lessor?

Correct Answer
verified

Correct Answer
verified

Leasing equipment due to a desire to avoid capitalization of the asset is considered an example of leasing to reduce uncertainty.

Correct Answer
verified

Provide a deﬁnition of a net advantage to leasing (NAL).

Correct Answer
verified
The NPV of the decis...
View Answer

An operating lease is deﬁned as a __ lease under which the _ is usually responsible for the maintenance, insurance, and taxes.

Correct Answer
verified

The riskiness of leasing cash ﬂows is most similar to the lessee's _____________ cash ﬂows.

Correct Answer
verified

The CRA will disallow any lease that:

Correct Answer
verified

In a direct lease, the lessor is the end user of the asset.

Correct Answer
verified

Correct Answer
verified

A ﬁnancial lease is generally cancellable without penalty if the lessee provides 30 days advance notice.

Correct Answer
verified

Which one of these statements is correct concerning the lease versus buy decision?

Correct Answer
verified

A ﬁrm that is very cyclical in nature and requires extra equipment only during its peak periods should consider leasing that equipment using a(n) _____ lease.

Correct Answer
verified

The term of an operating lease is relatively short.

Correct Answer
verified

Correct Answer
verified

What is the present value of the depreciation tax shield?

Correct Answer
verified

Themost commonly cited reason for leasing is that __________________.

Correct Answer
verified

Correct Answer
verified

Exam 22: Behavioral Finance: Implications for Financial Management

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following is NOT required in order to calculate the net advantage to leasing (NAL) ?

Correct AnswerverifiedShow Answer

Which of the following is the best deﬁnition of a lessor?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Leasing equipment due to a desire to avoid capitalization of the asset is considered an example of leasing to reduce uncertainty.

Correct AnswerverifiedShow Answer

Provide a deﬁnition of a net advantage to leasing (NAL).

Correct AnswerverifiedThe NPV of the decis...View AnswerShow Answer

An operating lease is deﬁned as a ______ lease under which the _____ is usually responsible for the maintenance, insurance, and taxes.

Correct AnswerverifiedShow Answer

The riskiness of leasing cash ﬂows is most similar to the lessee's _____________ cash ﬂows.

Correct AnswerverifiedShow Answer

The CRA will disallow any lease that:

Correct AnswerverifiedShow Answer

In a direct lease, the lessor is the end user of the asset.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A ﬁnancial lease is generally cancellable without penalty if the lessee provides 30 days advance notice.

Correct AnswerverifiedShow Answer

Which one of these statements is correct concerning the lease versus buy decision?

Correct AnswerverifiedShow Answer

A ﬁrm that is very cyclical in nature and requires extra equipment only during its peak periods should consider leasing that equipment using a(n) _____ lease.

Correct AnswerverifiedShow Answer

The term of an operating lease is relatively short.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

What is the present value of the depreciation tax shield?

Correct AnswerverifiedShow Answer

Themost commonly cited reason for leasing is that __________________.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
The NPV of the decis...
View Answer

An operating lease is deﬁned as a __ lease under which the _ is usually responsible for the maintenance, insurance, and taxes.

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified