Chapter 25 Quiz, The Many Different Kinds of Debt




1. In a lease arrangement, the owner of the asset is:
A.The lien
B.The lessee
C.The lessor
D.The leaser


2. Which of the following statements is not true?
A.The lessee does not have to buy the equipment
B.The lessee is responsible for making the lease payments
C.The lease payments are not tax-deductible
D.The lessee gives up the depreciation tax shield
E.All of the above


3. If the lessor borrows much of the purchase price of a leased asset, the lease is called:
A.A leveraged lease
B.A sale-and-leaseback
C.A capital lease
D.A nonrecourse lease
E.None of the above


4. The primary characteristics of an operating lease are:
A.Fully amortized, lessee maintain equipment and there is no cancellation clause
B.Not fully amortized, lessor maintains equipment and there is a cancellation clause
C.Fully amortized, lessor maintain equipment and there is a cancellation clause
D.Not fully amortized, lessor maintains equipment and there is no cancellation caluse


5. Which of the following are dubious reasons for leasing?
A.Leasing avoids capital expenditure controls
B.Tax shields can be used
C.The lessor is well equipped to provide efficient maintenance
D.Standardization leads to low administrative and transaction costs
E.All of the above


6. If the after-tax present value of buying an equipment and using it for 6 years is $100,000, calculate the break-even after tax close payment each year (7 payments) using 6% discount rate. (Assume that the lease payments are made at the beginning of the year.)
A.$14,286
B.$17,341
C.$18,555
D.$16,900


7. Assume the initial financing provided by a lease is $100,000 and the present value of the cash outflow attributable to the lease is $90,000. Then the net value of the lease is:
A.$10,000
B.-$10,000
C.$190,000
D.None of the above


8. Which of the following changes would make leasing more attractive? Assume the lessee is not paying taxes.
A.A fall in interest rates
B.A reduction in the leased asset's expected economic life
C.A general increase in the corporate tax rate
D.A switch from accelerated to straight-line to tax depreciation


9. 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 $8,100 to buy and would be straight-line depreciated to a zero salvage over 9 years. The firm can borrow at a rate of 8%. The corporate tax rate is 30. What is the NPV of the lease?
A.-$1039.78
B.$6,610.22
C.$686.00
D.$360.00
E.None of the above


10. A financial lease is likely to be most beneficial to both parties when:
A.The lessor's tax rate is lower than the lessee's
B.The lessor's tax rate is higher than the lessee's
C.The lessor's tax rate is equal to the lessee's
D.A financial lease always has zero NPV, so both parties always break even.


11. From the lessee's point of view, which of the following is not a direct cost associated with leasing?
A.The foregone depreciation tax shield
B.The after-tax lease payment
C.The purchase price of the asset
D.Debt displacement


12. In valuing the lease versus purchase option, an irrelevant cash flow is:
A.Tax shield from depreciation
B.Investment outlay for the equipment
C.Operating cash flows associated to the new machine
D.All of the above are not irrelevant
E.All of the above are irrelevant


13. Financial leases are a source of financing.
A.True
B.False


14. In a sale and lease-back, the firm sells the asset it already owns and leases it back from the buyer.
A.True
B.False


15. Leasing is more likely to be advantageous when depreciation is accelerated.
A.True
B.False



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