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1 | |
Which of the following must be met for a lease to be valid for tax purposes according to the IRS?
I. The term of the lease must be less than 90% of the economic life of the asset II. The least must have a bargain purchase option, transferring the residual value to the lessee
III. Renewal options reflect fair market value of the asset |
| | A) | I only |
| | B) | III only |
| | C) | I and III only |
| | D) | II and III only |
| | E) | I, II, and III |
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2 | |
A good reason for leasing is _____________________. |
| | A) | that leasing provides 100% financing |
| | B) | that leasing provides a source of off-balance sheet financing |
| | C) | that by leasing, the lessee's income statement will be stronger |
| | D) | that taxes may be reduced by leasing |
| | E) | that, unlike borrowing and buying, leasing decreases a firm's financial leverage |
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3 | |
Which of the following describe an operating lease?
I. The lease is cancelable at the option of the lessee II. The term of the lease is relatively short
III. The lessor is typically required to maintain the asset |
| | A) | I only |
| | B) | II only |
| | C) | III only |
| | D) | II and III only |
| | E) | I, II, and III |
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4 | |
Good reasons for leasing include all of the following EXCEPT __________. |
| | A) | that taxes may be reduced by leasing |
| | B) | that leasing transfers uncertainty about the future value of the leased asset to the lessor |
| | C) | that leasing may encumber fewer assets than borrowing |
| | D) | that leasing may not increase a firm's financial leverage |
| | E) | that leasing is a source of 100% financing for an asset |
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5 | |
The riskiness of lease cash flows are most similar to the lessee's _________ cash flows. |
| | A) | unit sales |
| | B) | debt financing |
| | C) | employee labor cost |
| | D) | common equity financing |
| | E) | net income |
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6 | |
Which of the following is NOT required in order to compute the NAL? |
| | 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 aftertax borrowing rate |
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7 | |
According to the text, the most commonly cited reason for leasing is that __________. |
| | 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 buying |
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8 | |
A lease in which the lessor borrows a large portion of the purchase price on a nonrecourse basis is called a |
| | A) | service lease |
| | B) | tax-oriented lease |
| | C) | conditional sales agreement lease |
| | D) | sale-and-leaseback arrangement |
| | E) | leveraged lease |
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9 | |
A lease in which the lessor is the owner of the leased asset for tax purposes is a __________. |
| | A) | leveraged lease |
| | B) | sale-and-leaseback arrangement |
| | C) | conditional sales agreement lease |
| | D) | tax-oriented lease |
| | E) | service lease |
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10 | |
An arrangement in 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 is called a(n) ____________. |
| | A) | leveraged lease |
| | B) | operating lease |
| | C) | conditional sales agreement lease |
| | D) | service lease |
| | E) | sale-and-leaseback arrangement |
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