Student Centre | Instructor Centre | Information Centre | Home

Fundamentals of Corporate Finance, 4/c/e

Fundamentals of Corporate Finance, 4/e

Stephen A. Ross, Massachusetts Institute of Technology
Randolph W. Westerfield, University of Southern California
Bradford D. Jordan, University of Kentucky
Gordon S. Roberts, York University

Leasing

Quick Quiz 1

After taking this quiz, click 'Submit Answers' for graded results. You'll also have the option of emailing the results to your instructor and/or yourself.


1	Which of the following is/are accounting criteria for a financial lease? I. The lease transfers ownership of the asset to the lessee by the end of the lease term. II. The lease term is at least 75% of the economic life of the asset. III. The present value of the lease payments is at least 75% of the fair market value of the asset at the start of the lease.
		A)	I only
		B)	I and III only
		C)	I and II only
		D)	II and III only
		E)	I, II, and III


2	Which of the following characteristics would cause a lease to be declared a capital lease for accounting purposes?
		A)	The present value of the lease payments equals 60% of the fair market value at the start of the lease.
		B)	The lease does not transfer ownership of the property to the lessee by the end of the lease term.
		C)	The lessor maintains the insurance and maintenance on the leased asset.
		D)	The lease term is at least 50% of the estimated economic life of the asset.
		E)	The lessee can purchase the asset at a price below fair market value when the lease expires.


3	Which of the following is a good reason for leasing?
		A)	Taxes may be reduced by leasing.
		B)	Off-balance sheet financing.
		C)	Stronger income statement.
		D)	It provides 100% financing.
		E)	It decreases a firm's financial leverage.


4	In terms of riskiness, lease cash flows are most similar to the lessee's cash flows attributable to __________.
		A)	unit sales
		B)	net income
		C)	employee labour costs
		D)	common equity financing
		E)	debt financing


5	Which of the following is/are required in order to compute the NAL? I. The depreciation tax shield. II. The cost of the leased asset. III. The lease payment. IV. The cost of equity.
		A)	I only.
		B)	I and IV only.
		C)	I and III only.
		D)	II and IV only.
		E)	I, II, and III only.


6	Which of the following makes an asset a likely candidate for leasing? I. The costs of buying and selling the asset (i.e. transactions costs) are high. II. The future market value of the asset is difficult to predict. III. Technological changes are likely to make the asset obsolete. IV. Borrowing to purchase the asset would subject the firm to debt-related restrictions.
		A)	II only.
		B)	I, II, III, and IV only.
		C)	III only.
		D)	II and III only.
		E)	II and IV only.


7	A decision on leasing requires the consideration of three major criteria: the original investment, the present value of the CCA tax shields, and the present value of after tax lease payments. If you were given the following information, what would your recommendation be? Original investment = $40,000, PV of CCA tax shield = $13,600, PV of after tax payments = $27,200.
		A)	Tell the potential lessee to accept the agreement.
		B)	Tell the potential lessor to accept the agreement.
		C)	Both would be indifferent between accepting and rejecting the agreement.
		D)	Tell them both to reject the agreement.
		E)	Tell them both to accept the agreement.


8	Our cost of capital is 10% and tax rate is 40%. We are considering purchasing a vehicle for $60,000 with a CCA rate of 30%. If the vehicle will be falueless after 5 years use, what is the CCA deduction in the first year? in the fourth year?
		A)	$3,600;$5,248
		B)	$6,012;$1,749
		C)	$3,600;$2,099
		D)	$9,000;$5,248
		E)	$7,200;$2,099


9	A(n) __________ is a lease in which the lessor borrows a large portion of the purchase price on a non-recourse basis.
		A)	leveraged lease
		B)	tax-oriented lease
		C)	conditional sales agreement
		D)	sale-and-leaseback arrangement
		E)	service lease


10	Which of the following is effectively a secured loan from the lessor to the lessee?
		A)	leveraged lease
		B)	operating lease
		C)	conditional sales agreement
		D)	sale-and-leaseback arrangement
		E)	single investor lease

2002 McGraw-Hill Higher Education
Any use is subject to the Terms of Use and Privacy Policy.
McGraw-Hill Higher Education is one of the many fine businesses of The McGraw-Hill Companies.