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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 2

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1	A lease may have very substantial effects on a company's __________.
		A)	balance sheet
		B)	income statement
		C)	tax expense
		D)	interest expense
		E)	all of the above


2	In 1979, the CICA changed rules regarding leases. These new rules require that the present value of __________ payments be reported on company balance sheets. I. capital lease II. operating lease III. finacial lease
		A)	I only.
		B)	II only.
		C)	III only.
		D)	I and II only.
		E)	I and III only.


3	Certain lease terms will disallow a lease from CCRA tax advantages. These are: I. The lessee automatically acquires title to the asset after payment of a certain amount in the form of rentals. II. The lessee is required to buy the property from the lessor during or at the termination of the lease. III. The lessee has the right during or at the expiration of the lease to acquire the property at a price below fair market value.
		A)	I only.
		B)	II only.
		C)	I, II, and III only.
		D)	I and III only.
		E)	II and III only.


4	In which of the following cases can a lease financially benefit both parties? I. There is no case in which a lease benefits both parties. Leases are a zero sum game. II. When the effective tax rates of both parties differ. III. When one party is in a low tax (or no tax) bracket and the other in in a high tax bracket. IV. Under CCRA rules, both parties cannot benefit. Both parties can benefit under American taxation laws.
		A)	II only.
		B)	III only.
		C)	II and III only.
		D)	I only.
		E)	I and IV only.


5	Which of the following is the relevant rate for evaluating a lease from the viewpoint of the lessee?
		A)	The cost of issuing new common stock.
		B)	The after-tax cost of issuing new debt.
		C)	The pre-tax cost of issuing new debt.
		D)	The firm's cost of capital.
		E)	The cost of retained earnings.


6	The net advantage to leasing (NAL) approach to evaluating lease arrangements is analogous to the __________ approach to evaluating capital expenditure projects.
		A)	payback period
		B)	average accounting return
		C)	net present value
		D)	internal rate of return
		E)	profitability index


7	Under a proposed lease agreement, the NAL for the lessor is $320. The NAL for the lessee is -$105. The two parties are in different tax brackets. Acting in the best interests of both parties, what advice would you give?
		A)	Tell the lessee to accept the deal and the lessor to reject the deal.
		B)	Tell both parties to renegotiate the lease so that both have positive NALs.
		C)	Tell the lessor to lower the payments so that the lessee's NAL is zero.
		D)	Due to the tax effect, renegotiation is useless. One party will win and the other will lose.
		E)	Tell both parties to accept the lease.


8	Our cost of capital is 10% and tax rate is 40%. We are considering leasing a vehicle which is entitled to a 30% CCA deduction. If the vehicle will be valueless in 4 years and the lease payments would be $23,000, what is the yearly lease payment tax shield on the vehicle?
		A)	$2,300
		B)	$3,200
		C)	$6,273
		D)	$6,900
		E)	$9,200


9	Which of the following is NOT a good reason for leasing?
		A)	Taxes may be reduced by leasing.
		B)	Future obsolescence of the leased asset.
		C)	Leasing may encumber fewer assets than borrowing.
		D)	Leasing provides 100% financing.
		E)	Leasing may not increase a firm's financial leverage.


10	A(n) __________ is an arrangement by which the lessee receives cash from the sale of the asset and continues to use it, in return for a promise to make periodic payments to the buyer.
		A)	leveraged lease
		B)	operating lease
		C)	conditional sales agreement
		D)	sale-and-leaseback arrangement
		E)	service lease

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