Exam 24: Leasing

A) In a nontax lease, the lessee can deduct the interest portion of the lease payments as an interest expense.
B) In a true tax lease, the lease payments are treated as revenue for the lessor.
C) In a true tax lease, the lessee receives the depreciation deductions associated with the ownership of the asset.
D) The IRS separates leases into two broad categories: true tax leases and nontax leases.

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A) Leasing allows the party best able to bear the risk to hold it. For example, small firms with a low tolerance for risk may prefer to lease rather than purchase assets.
B) When the lessor is the manufacturer, a lease in which the lessor bears the risk of the residual value can improve incentives and lower agency costs.
C) For leases in which the lessor retains a substantial interest in the asset's residual value, the lessee has more of an incentive to take proper care of an asset that is leased rather than purchased.
D) Whether they appear on the balance sheet or not, lease commitments are a liability for the firm.

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A) Whether they appear on the balance sheet or not, lease commitments are liabilities for the firm.
B) For most large corporations, the amount of leverage the firm can obtain through a lease is unlikely to exceed the amount of leverage the firm can obtain through a loan.
C) Some companies may place limits on the dollar amounts a manager can invest over a certain period.
D) All of the above are reasons why reducing leverage through off-balance sheet financing is not a valid argument for leasing.

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A) If the lease is deemed to be a true lease, the firm is assumed to have effective ownership of the asset and the asset is protected against seizure.
B) Although the legal ownership of the asset resides with the lessor, in a nontax lease the lessee receives the depreciation deductions.
C) The treatment of leased property in bankruptcy will depend on whether the lease is classified as a security interest or a true lease by the bankruptcy judge.
D) In a nontax lease, the interest portion of the lease payment is interest income for the lessor.

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A) A lease is a contract between two parties: the lessee and the lessor.
B) Most leases involve little or no upfront payment.
C) The lessee is the owner of the asset, who is entitled to the lease payments in exchange for lending the asset.
D) At the end of the contract term, the lease specifies who will retain ownership of the asset and at what terms.

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A) Most financial analysts and sophisticated investors consider operating leases (which must be listed in the footnotes of the financial statements) to be additional sources of leverage.
B) By carefully avoiding the four criteria that define an operating lease for accounting purposes, a firm can avoid listing the long-term lease as a liability.
C) Because a lease is equivalent to a loan, the firm can increase its actual leverage without increasing the debt-to-equity ratio on its balance sheet.
D) For most large corporations, the amount of leverage the firm can obtain through a lease is unlikely to exceed the amount of leverage the firm can obtain through a loan.

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A) FMV lease versus $1.00-out lease
B) $1.00-out lease versus true tax lease
C) lease versus buy
D) lease versus borrow

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First we construct the FCF from leasing ...

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A) $1,870
B) $1,825
C) $1,750
D) $2,115

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A) fair market value cap lease
B) fair market value lease
C) $1.00-out lease
D) fixed price lease

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When a firm enters into a lease, it is c...

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If the firm acquires the fleet through a...

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A) The property may be acquired at the fair market value of the asset at the time when the option may be exercised.
B) Some portion of the lease payments is specifically designated as interest or its equivalent.
C) The lessee receives ownership of the asset on completion of all lease payments.
D) The total amount that the lessee is required to pay for a relatively short period of use constitutes an inordinately large proportion of the total value of the asset.

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A) By offering assets together with complementary services, lessors can achieve efficiency gains and offer attractive lease rates.
B) Assets leased under a true lease are afforded bankruptcy protection and cannot be seized in the event of default.
C) Because of the higher recovery value in the event of default, a lessor may be able to offer more attractive financing through the lease than an ordinary lender could.
D) Lessors often have efficiency advantages over lessees in maintaining or operating certain types of assets.

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A) Buy the scanner; the NPV of the decision = $74,890.28.
B) Buy the scanner; the NPV of the decision = $1,749,890.28
C) Lease the scanner; the NPV of the decision = $1,812,027.19
D) Lease the scanner; the NPV of the decision = $692,559.51

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A) For a lease to be attractive to both the lessee and the lessor, the gains must come from some underlying economic benefits that the leasing arrangement provides.
B) With a true tax lease, the lessor replaces depreciation and interest tax deductions with a deduction for the lease payments.
C) Generally speaking, if the asset's tax depreciation deductions are more rapid than its lease payments, a true tax lease is advantageous if the lessor is in a higher tax bracket than the lessee.
D) A tax gain occurs if the lease shifts the more valuable deductions to the party with the higher tax rate.

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A) The decision to lease is often driven by real-world market imperfections related to leasing's accounting, tax, and legal treatment.
B) When publicly traded firms disclose leasing transactions in their financial statements, they must follow the recommendations of the Financial Accounting Standards Board (FASB) .
C) In its Statement of Financial Accounting Standards No. 13 (FAS13) , the FASB provides specific criteria that distinguish a true tax lease from a nontax lease.
D) The categories used to report leases on the financial statements affect the values of assets on the balance sheet, but they have no direct effect on the cash flows that result from a leasing transaction.

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A) The lease-equivalent loan is the loan that is required on the purchase of the asset that leaves the purchaser with the same obligations as the lessor would have.
B) Lease obligations themselves could trigger financial distress.
C) When a firm enters into a lease, it is committing to lease payments that are a fixed future obligation of the firm.
D) When a firm leases an asset, it is effectively adding leverage to its capital structure (whether or not the lease appears on the balance sheet for accounting purposes) .

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